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Structuring Regulation

The central dilemma inherent in designing effective regulatory institutions is how regulatory decisions should be taken and where they should be located in the wider structures of governance. By representing the state as a series of institutions that derive authority from a constitutional structure and developing the doctrine of separation of powers as an analytical device, case studies relating mainly to insolvency and competition in India are analysed. While insolvency tribunals could make for â??speedy decisionsâ?, this could lead to social costs associated with the violation of the doctrine of separation of powers and the breakdown of inter-institutional bargaining. The Competition Act, 2002 is also an inappropriately structured law for these very reasons.


Structuring Regulation

Constitutional and Legal Frame in India

The central dilemma inherent in designing effective regulatoryinstitutions is how regulatory decisions should be taken and wherethey should be located in the wider structures of governance. Byrepresenting the state as a series of institutions that deriveauthority from a constitutional structure and developing thedoctrine of separation of powers as an analytical device, casestudies relating mainly to insolvency and competition in India areanalysed. While insolvency tribunals could make for “speedydecisions”, this could lead to social costs associated with the violation of the doctrine of separation of powers and the breakdown ofinter-institutional bargaining. The Competition Act, 2002 is also aninappropriately structured law for these very reasons.


s the Indian economy transforms itself successively towards a more market-oriented economy, one of the key moves has been to create institutions that regulate various sectors of the economy – for example telecommunications, insurance, finance and banking. The genesis of such regulatory institutions gives rise to problems of design that are depicted by the following quotes, “The Supreme Court today heavily came down on the appointment of a bureaucrat to head a quasi-judicial body, [The Competition Commission] terming this as an attempt to usurp the powers of the judiciary” (The Economic Times, November 1, 2003).

An independent central bank focused exclusively on price stability has become a central part of the mantra of “economic reform”. Like so many other policy maxims, it has been repeated often enough that it has come to be believed. But central banks make decisions that affect every aspect of society, including rates of economic growth and unemployment. Because there are trade-offs, these decisions can only be made as part of a political process (J Stiglitz, Project-Syndicate, June 2003,

These two quotes illustrate the central dilemma inherent in the problem of designing effective regulatory institutions – keeping in mind the aims of regulatory decisions, how should such decisions be taken and, notably, where should they be located in the wider structures of governance? Traditional analysis of regulation often aims to evaluate the efficacy of the mechanisms or instruments used to achieve professed ends, or it seeks to evaluate objectives and the functioning of regulatory agencies. While such analysis is widely practised, and is undoubtedly important and essential, it is critical to realise that the choice of instruments and their use takes place inside the wider construct of governance and in particular, constitutional governance. One way of confronting the issues raised in the quotes is to seek an answer to the question – how and where should one locate regulation inside a constitutional schema? In this paper we seek to analyse regulation in terms of the appropriate location of the institutions that comprise and effectuate regulation within the constitutional paradigm.

In attempting an institutional analysis of this kind, we are obliged to conceptually represent the state. This is an essential task because regulatory commands emanate either directly from the state or a body delegated by the state. Mainstream economics does not, by and large, engage significantly with the notion of state in this context. This in itself is not problematic to the extent one is exploring social behaviour in the “marketplace”, but since regulation is the purported response to market failure, an analysis of the many instances of market failure inevitably solicits the presence of the state. Thus, when the public interest theory of regulation perceives regulation as the coordinated correction of varieties of market failure by simulating outcomes that the market would have configured in the absence of such failure, it is implicitly believed that a selfless state acts to effect such correction. This is problematic because, among other things, such understanding of regulation treats the state as a black box. Since the state is viewed as a black box, there is no space for the isomorphic image of market failure – government failure. To quote a perceptive statement made by Coase (1964), while acting as a discussant for a series of papers on regulation, “Until we realise that we are choosing between social arrangements which are all more or less failures, we are not likely to make much headway”.

In the first part of this paper, we construct an approach, which attempts to negotiate an understanding of the “failures” referred to by Coase, allowing us to analyse the pattern of governance of regulation. At the outset of Section I we enter into the social arrangement of the state by schematically representing it as a series of institutions that derive authority from a constitutional structure – in particular developing the doctrine of separation of powers as an analytical device. We follow this by placing regulation in this scheme of constitutional governance. In Section II of the paper we use the analytical tools developed in the previous section to develop some case studies to illustrate the approach. While we look specifically at insolvency and competition in India and briefly touch on the issues surrounding the structure of central banks,we believe that our analysis can extend to a number of other regulatory institutions as well. Section III concludes the paper.

I The Constitution

While the understanding of the state as a social arrangement is the substance of political philosophy, this can be slippery territory for economics. The hazard stems both from the methodology and the evaluative norm of efficiency (wealth maximisation) employed by economics. We do not directly engage with any of these issues; instead we move towards employing an instrumental perspective on the state by asking – What is it in practice that defines the modern liberal state? The answer probably lies in its privileging of representative democracy as the fundamental and primary value pursued. Such representative democracy can be constructed in a variety of forms – for instance it could either be a presidential or parliamentary democracy, it could be based on proportional or majoritarian representation.

Whatever the case may be (again, we do not engage with such questions in the interest of focusing on the problem at hand), it is almost invariably true that in a liberal democracy the Constitution is the highest source of law in a nation state.1 The Constitution creates the state as a social arrangement by specifying offices and the powers and procedures of these offices. To phrase this in the language developed by the literature on constitutional public choice – it can be viewed as the document that specifies the rules of the game within which social arrangements are required to function. This characterisation extends both spatially and temporally. In the temporal sense, Constitutions play a particularly vital role of mitigating uncertainty – by restricting in period choices, which may be inimical for the long run social good [Brennan and Hamlin 2000].

In addition to specifying the grand rules, Constitutions also typically seek to guarantee and promote a set of normative values in society. Thus for instance the Constitution of India sets out the task of justice, liberty, equality and fraternity as the central aim – as do the Constitutions of many other nations. One way of interpreting such normative values is to read them as a series of functional concerns that are essentially incorporated into the structure of the Constitution. Thus, liberty, which provides the individual with the freedom to choose, seeks to expand the domain of individual action. The notion of justice similarly has a number of attributes that includes both the concerns of equity and efficiency and equality of status and opportunity similarly have both process and consequentialist dimensions.

To balance these concerns and in particular the concern of liberty – understood in the “negative” sense [Berlin 1961], liberal Constitutions are typically constituted to include the doctrine of separation of powers, motivated by the elemental Montesquian argument that since the state has three powers – legislative, executive and judicial, concentrating these powers in any one or two bodies would diminish liberty [Montesquieu 1949]. Economists have recently addressed this structural argument by showing that the doctrine of separation of powers improves social welfare by reducing the quantum of rent seeking activity in the economic system [for example, see Perrson et al 1997; Laffont 2000; Padovano et al 2003].

However the doctrine can also be invoked in a more functional sense that complements the structural explanation emphasised by Montesquieu. We have explored such a functional interpretation of separation of powers in an earlier work where we analysed judicial activism – developing the functional aspect of the doctrine by drawing on the notion of transaction costs2 to look at the social implications of the doctrine being breached [Anant and Singh 2002]. More specifically, it was argued that the endemic presence of transaction costs makes it impetrative that when the state exercises a choice, such choice be delegated to the institution best equipped to minimise transaction costs – a breach of this acts to raise transaction costs and therefore results in a misallocation of resources. Thus, one can view the broad divisions engendered by the separation of powers doctrine – the legislature, executive and judiciary, as being justified on the grounds that each branch is equipped to process different categories of information and therefore possesses a different mechanism of decision-making.3 In this scheme, activism comes to be defined as a branch extending its mechanism of decisionmaking on the grounds of privilege onto problems that are the forte of some other branch. The consequences of such activism can be ambiguous, in the sense that depending on the circumstances, activism can either enhance or diminish social welfare.

While these structural and functional arguments make a persuasive case for a strong or strict separation of powers, there is another dimension to the separation of powers doctrine that needs to be noted. It has recently been pointed out that the doctrine not only separates decisions but also requires interaction across the branches of the state; such interaction can be understood as a bargain, which in turn implies that interactions between the branches can be quite costly in terms of negotiating costs [Cooter 2000]. For instance, if a law passed by the legislature is held to be unacceptable by the judiciary, the response is to either reframe the law or to accept the rejection of the law. The negotiation costs associated with such processes can aid the impulse towards unitary concentration of power that assists the speed and expediency of decisionmaking, but then costs emerge from the violation of the doctrine of separation of powers. A case in point here is the progressive destruction in India of the fundamental right to property consequent to a series of moves by the legislative/executive branches of the Indian state to establish unitary power. This process has, among other things, generated social costs associated with the violation of the doctrine of separation of powers, both in a structural as well as functional sense [Singh 2004].

This suggests the following typology – if the separation of powers doctrine is strongly maintained, social costs associated with the violation of the doctrine are held under check and systems are generated for bargaining across the branches of the state, leading, among other things, to predictable governance, but causing attendant negotiation costs to be borne in terms of resources and speed of decisions. On the other hand, if the separation of powers doctrine is weakly maintained, there is a high likelihood of social costs being generated by rent seeking behaviour and/or activism, but resource use is minimised in the sense that the unitary institution is able to advance with the act of making decisions with haste.

Separation of Powers and Regulation

This typology can be advantageously harnessed to analyse the project of structuring regulation. Regulation – particularly the form that is getting to be quite ubiquitous in India currently, can be understood as being associated with special categories of contracts that require to be governed by special regulatory agencies created by the state. The explicit or implicit presumption behind setting up such bodies is the belief that standard contract law inadequately services certain contracts, such as those associated with public utility provision, because unlike discrete contracts, these contracts on the one hand involve substantial degree of asset specificity and on the other hand benefit a large number of users – sometimes as large as the voting population. In these instances, the regulator plays the role of administering the

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contract by achieving a balance between, to use Goldberg’s phrases, the producer’s “right to serve” against the consumer’s “right to be served” [Goldberg 1976]. If it is accepted that the act of regulation is to administer contracts that cannot be adequately performed under the aegis of contract law, the question clearly arises as to how the “administrator of contracts” is placed in relation to the constitutional scheme.

Since the administrator or the regulator needs to process a variety of information which includes concerns such as: assessment of benefits and costs that accrue to the target population as a result of the regulation, the nature of technology, its distribution and the structure and implementation of contracts between producers, resource owners and final consumers, the act of regulation reflects an amalgam of functional skills we have referred to earlier viz, legislative, executive and judicial, signifying that regulatory activity involves a hybrid conglomeration of the three functions. In principle, there need be no objection to a hybrid institution that combines elements of the three functions of the state as long as it is possible to slot the various dimensions of a regulatory problem in the appropriate functional slot. Further, it follows that the regulator must be empowered with adequate resources and structures in order to process the different kinds of information needed for its decision-making. This is however more likely only if there is a strong doctrine of separation of powers in place. If on the other hand the doctrine is weakly exercised overall then there is the hazard that the constituent departments of the hybrid body may be over and/or under-delegated. Such over/ under-delegation can lead to social costs analogous to the costs imposed by activism

– in fact it is the case that inappropriate delegation is but a variant of activism. We seek to develop this point by looking at a few case studies in the next section of this paper.

II Case Studies

Insolvency Tribunals

The reforms initiated in the Indian economy in 1991 as well as the debate on financial systems after the Asian crisis brought forth the need to modernise the law on insolvency, particularly as it relates to corporate insolvency. To deal with this class of issues the Indian government appointed a committee in 1999 – referred to widely as the Eradi Committee (chairman: Justice B Eradi) to examine the law relating to insolvency of companies. Independent of this exercise, the Reserve Bank of India constituted a set of advisory groups to examine the status of India’s compliance with the international financial standards and codes.4 As part of this exercise an Advisory Group on Bankruptcy Law5 comprising of lawyers, financial market experts and academics was set up. We do not take up the wider issue of bankruptcy or debt recovery here; instead we confine ourselves to an analysis of the structure of governance recommended by the two bodies.

Turning first to the Eradi Committee,

which recommended: (Para 7.1) The whole issue of law relating to insolvency of companies should be viewed not only on basis of the existing provisions of Part VII of the Companies Act, 1956 but also other relevant laws having a bearing on the subject, such as Sick Industrial Companies (Special Provisions) Act, 1985, (SICA), Recovery of Debts due to Banks and Financial Institutions Act, 1993, UNCITRAL Model Law on Cross Border Insolvency approved by United Nations (Annexure A) and International Monetary Fund report on “Orderly and Effective Insolvency Procedures” (Annexed as B) The Committee, therefore, recommends that the provisions of Part VII of the Companies Act, 1956, be amended to include the provisions for setting up of a National Tribunalwhich will have (a) the jurisdiction and power presently exercised by Company Law Board under the Companies Act, 1956; (b) the power to consider rehabilitation and revival of companies – a mandate presently entrusted to BIFR/AAFIR under SICA; (c) the jurisdiction and power relating to winding up of companies presently vested in the high courts. In view of above recommendations Article 323B of the Constitution should be amended to set up National Tribunal. SICA should be repealed and the Companies Act, 1956 be amended accordingly.

(Para7.2) In continuation with the committee’s recommendation in para 7.1, the committee recommends that the

tribunal should be headed by a sitting judge or a former judge of a high court and each of its benches should consist of a judicial member and a technical member. Tribunal shall have such number of members as may be prescribed by the central government.

(1) The principal bench of the tribunal should be located at New Delhi and its benches should be located at the principal seats of each high court.

(2) The central government may set up more such benches if so required (emphasis added).

The key point to be noted here is that the committee recommended setting up a tribunal to try cases of insolvency, which would not be subject to the jurisdiction of the high courts and therefore also called for an amendment to the Constitution. (The need for a constitutional amendment is clarified below.) In contrast, the RBI advisory group chose to recommend the installation of a Special Bankruptcy Bench in each high court to deal with insolvency. They reasoned

In spite of the fact that tribunalisation of justice is now a settled fact especially after L Chandra Kumar [(1997)3SCC, 261], there is a philosophical debate going on as to the nature, extent, structure and power. Even Justice Eradi Committee commented that in order to make National Tribunal able to quicken the dispute resolution, Article 323A and B of the Constitution is to be amended. This group does not think that such a step, bypassing the judiciary, is necessary or possible:

  • (a) A special bench of the high court as a full time bankruptcy court shall serve all purposes as well as quickening the issue of the procedure recommended;
  • (b) A special bench of the high court will be able to bring multidimensional knowledge necessary for restructuring/reorganisation and bankruptcy proceedings; and
  • (c) A special bench shall add validity of action in all renegotiated proposals and on the failure of restructuring process, quicken the insolvency proceeding.
  • To appreciate the contrast between the two recommendations, it is essential to look at both the rationale for instituting tribunals and their operation in India. A tribunal is a good example of a hybrid institution that straddles a line between the executive and judicial functions. In India many activities – labour and environment to name a couple, are governed by tribunals usually justified by the need for specialist knowledge and by the call for expediency in a clogged legal system, but their success is by no means clear. An evaluation by the Malimath Committee on the functioning of tribunals has been particularly telling:

    Several tribunals are functioning in the country. Not all of them, however, have inspired confidence in the public mind. The reasons are not far to seek. The foremost is the lack of competence, objectivity and judicial approach. The next is their constitution, the power and method of appointment of personnel thereto, the inferior status and the casual method of working. The last is their actual composition; men of calibre are not willing to be appointed as presiding officers in view of the uncertainty of tenure, unsatisfactory conditions of service, executive subordination in matters of administration and political interference in judicial functioning. For these and other reasons, the quality of justice is stated to have suffered and the cause of expedition is not found to have been served by the establishment of such tribunals.6

    The Malimath Committee also recommended that instead of instituting tribunals, changes be carried out within the high courts, dividing them into separate divisions for different branches of law as is the case in England. It stated that appointing more judges to man the separate divisions while using the existing infrastructure would be a better way of remedying the problem of pending cases in the high courts, rather than creating new bodies. Subsequently an important judgment of the Supreme Court of India, the Chandra Kumar judgment,7 taking a view contrary to the insights of the Malimath Committee, upheld the legal validity of tribunals but insisted that the Constitution required the decisions of the tribunals be subject to the scrutiny of the high courts – hence the call by the Eradi Committee to amend the Constitution. The judgment however did take cognisance of the point that tribunals need to be reformed: “However, drastic measures may have to be resorted to in order to elevate their standards to ensure that they stand up to constitutional scrutiny in the discharge of the power of judicial review conferred upon them” and suggested certain guidelines to do so.

    Turning back to the recommendations of the Eradi Committee and the advisory group, it is important to note that both groups felt that excluding the jurisdiction of the high court would need an amendment to the Constitution. In this context, it may be noted that a subsequent judgment of the Supreme Court8 recently followed the L Chandra Kumar case and upheld the creation of debt recovery tribunals and similarly also upheld the requirement for judicial review by the high court under Articles 226 and 227 of the Constitution. The RBI Advisory Group recognised the possibility of constitutional change but felt that apart from other reasons, the political capital to implement such an act would be limited. This suggests an important point that is surprisingly often ignored, that in any enterprise of setting up a regulatory body it is essential to keep in mind the constitutional scheme.

    The overall position of the advisory group is similar in spirit to the Malimath Committee recommendation – both feel it important to preserve the role of the judicial system by improving it and not by creating new bodies, which may be subject to similar if not greater problems. It also needs to be appreciated that if the rationale for upholding tribunals is to incorporate specialist knowledge, what we have termed earlier as the executive function, this can be done either by a quasi-judicial body (tribunal) or by strengthening the executive capacity of the courts. The advisory group outlined a framework in which a “trustee” could do this – the idea being that a bankruptcy court needs the expertise that only an effective executive agency can deliver and the trustee could provide this expertise to the court. The Eradi Committee tried to bring in this element of the executive branch of government by asking that remedies to the endemic problems facing tribunals be in tune with the guidelines suggested in the L Chandra Kumar case. These alternate suggestions point to the fact that the amalgamation of functional attributes, which are important for overall governance, can be done in more than one way.

    In spite of this backdrop and experience what has actually materialised does not incorporate the concerns raised by either the Eradi Committee or the advisory group. In December 2002 the Indian Parliament passed the Companies (Second Amendment) Act, 2002 providing for a national tribunal but no amendment was made to the Constitution. The act provides for benches but it is not clear if they will ensure that a bench will be located at the principal seats of each high court. Thus on the one hand the act seeks to supplant the high courts but on the other makes no attempt to ensure that the coverage is compatible with the court system or the Constitution. Further the act provides for only a single appellate tribunal. Overall it may be noted that the attempt to restructure the Companies Act has been characterised by a reluctance to pose either the constitutional question or the modified high court solution, not because the coalition governments could not have passed constitutional amendments – over this period at least three9 constitutional amendments, namely, 84th (electoral delimitation) 85th (Art 16 seniority) and 86th (21A right to education) were in fact passed. The

    Economic and Political Weekly January 14, 2006

    limitation is rather linked to the inability to negotiate with constitutional entities and an inadequate comprehension of the functional/structural importance of the doctrine of separation of powers.

    One of the earlier problems with the old law was its inadequate appellate structure, yet the act provides for appeal only to the Supreme Court – obviously in conflict with the pattern of the court structure and the Constitution. It may be entirely possible that the higher courts may eventually rule this structure to be legitimate as was done with the debt recovery tribunals in 200210 but what is certain is that it has led to an extended period of litigation to establish legitimacy. In this context the writ jurisdiction of the high courts has been used to raise issues of the hierarchy of rights and the act continues to be in limbo as a result of a decision of the Madras High Court, which declared it ultra vires of both legislative competence and the Constitution of India.11 The matter is currently sub judice since the case is under appeal in the Supreme Court. However, the content of the judgment issued by the Madras High Court is of great relevance to the argument being made in this paper because it explicitly points out that the act encourages an over-delegation of powers in favour of both the executive and legislative branches of the state at the expense of the judicial branch. It is pointed out that such over-delegation is manifested in the act by the executive incidence in the composition, selection and terms of tenure of members comprising the tribunal – furthermore, even the powers of the president of the tribunal are subject to executive control. The following quote from the judgment is representative of the unease of the court with this structure:

    The constitutional guarantee of a free and

    independent judiciary, and the constitu

    tional scheme of separation of powers can

    be easily and seriously undermined, if the

    legislatures were to divest the regular courts

    of their jurisdiction in all matters, entrust

    the same to newly created tribunals which

    can appropriately be labelled, borrowing

    the language of the US Supreme Court, as

    “legislative courts”, and assert that such

    forums not being regular courts and their

    members not being members of the “ju

    dicial service” of the state, they are not

    entitled to protection similar to the con

    stitutional protection afforded to the courts.

    Consequent to this the court goes on to conclude that:

    If the constitutional scheme and intent are

    to be preserved, it must be held that the “total insulation of the judiciary” referred to in the case of Sampath Kumar is not just for the “judiciary” comprising of judges appointed to the regular courts. The “judiciary” in this context must be understood as taking within it’s fold, all courts and tribunals and other adjudicatory bodies, whatever be the label assigned to them. The independence and impartiality which are essential for the proper exercise of the judicial power, are to be secured not only for the courts but also for tribunals and their members, who, though they do not belong to the “judicial service”; are entrusted with judicial powers.

    The court then went on to order:

    In the light of foregoing discussions it is declared that until the provisions in parts 1B and 1C of the Companies Act introduced by the Companies (Amendment) Act, 2002, which have been found to be defective inasmuch as they are in breach of the basic constitutional scheme of separation of powers and independence of the judicial function, are duly amended, by removing the defects that have been pointed out, it would be unconstitutional to constitute a tribunal and appellate tribunal to exercise the jurisdiction now exercised by the high courts or the Company Law Board.

    This judgment is noteworthy because it does not seek to restrict the powers of the legislature to legislate nor does it seek to limit the creation of tribunals – the argument is in fact more subtle, stating that the constitutional guarantees of an independent judiciary and separation of the judiciary from legislative and executive functions would be negated if Parliament were to create tribunals that substitute for courts under the control of the executive. The point is that substitute forums must also fall within the framework of constitutionally mandated separation of powers. If indeed the doctrine of separation of powers is not upheld in the interest of expediency – real or imagined, the social costs that are generated by violation of the doctrine (both in a functional as well as structural sense) are bound to make new regulatory bodies ineffective.

    Competition Commission

    The Competition Commission envisioned by the new Competition Act, 2002 poses a similar problem. The expert committee that had proposed the new competition bill had suggested that the composition of the commission be done through a selection committee that include the chief justice of India. However, when the bill was finally placed before Parliament the government moved an amendment to restrict this and said that “chairperson and other members shall be selected in the manner as may be prescribed”. Further, the selection committee included the law minister instead of the chief justice, contrary to the assurance given to Parliament. The first chairperson selected was from the bureaucracy. This resulted in a PIL with the Supreme Court asking how a bureaucrat can be asked to “discharge a judicial function”. The controversy led to the cancellation of the appointment delaying the formation of what is a critical regulatory body.12

    To appreciate the issue involved it is important to realise that competition law in India, as in other countries, has two elements. The first pertains to the intent of the law, which creates a set of rights relating to the functioning of markets. More specifically it enshrines competition as an entitlement and agreements and actions that seek to adversely effect competition are sought to be restricted.13 The second element of the law pertains to how the law has been structured to perform the intended task. Such structuring needs to be sensitive to the fact that the act of ensuring competition requires both executive and judicial skills. The executive harnesses specialised knowledge of assessing markets and judicial involvement ensures procedural and substantive objectives are complied with and in particular, asymmetric information is processed in an apt fashion.

    The problems raised in the PIL before the Supreme Court relate to this dimension of the law. The question is not a merely the facile issue of whether the head of the commission should be a judge or a bureaucrat. While it can be argued that competition authorities in other parts of the world are headed by non-judicial personnel (as indeed the union of India is reported to have argued before the Supreme Court in the case mentioned above) it needs to be appreciated that such structures must be consistent with the nature of separation of powers in that society. For instance, in the US, adjudication of competition cases is performed by the courts with an executive element provided by the FTC; in England by a body headed by specialists, which is embedded into their legal system with appeals to an appellate authority, the high court and the House of Lords; and in Australia by a judge assisted by experts, again with a provision for judicial separation.

    The point is that in all these instances there is sensitivity to the functional separation of powers,14 a sense that is clearly lacking in the Indian structuring of the act. Thus in the Indian case while the identity of the person heading the commission – bureaucrat or judge may not in itself be more than a turf war, it is important to emphasise the wider need to include a judicial arm and the functional skills it represents in an amalgamated body that seeks to regulate economic activity.

    Concern with the structure of the law throws up an additional problem related to the geographic separation between the centre and the states. The provisions of the Competition Act have wide coverage, incorporating all goods and services and all possible markets, thus including in its remit both nationwide markets as well as specific local or regional markets. In this context it needs to be noted that the Constitution clearly provides for separate domains of executive intervention through the vehicle of central, state and concurrent lists in the Seventh Schedule of the Constitution. This raises a number of interesting possibilities; for instance, agricultural markets are covered by the state list, provoking an intriguing question as to whether the commission can institute an inquiry in relation to some practice in these markets. If the commission is understood as an arm of the executive, then the issue of distribution of powers across the centre and the states will also clearly arise, possibly bringing up the question as to whether the central executive is interfering in a market that is clearly provided for in the state list. Even if the power of the commission to inquire and adjudicate were upheld, the issue of the ability of the state government to grant a public service exemption will remain as a residual concern, since the act states that the power to issue an exemption lies with the central government.

    Autonomy of Central Banks

    The broad nature of these concerns with the structure of institutions extends to the final example in this paper – the case of central banks. The independence of the central bank can be viewed from three perspectives based on the three broad roles of the RBI15 as the formulator of monetary policy, banker to the centre and the states and as the regulator of banks.

    The principal theoretical justification of independence comes from the role of central banks in formulating monetary policy. The economic background for this stance comes from considerations of time inconsistency in government policy, when policymakers can resort to monetary stimulation to trigger short-term output cycles. This then leads to discussions about the objectives of monetary policy and the need or importance to segregate them from fiscal policy. It may also be the case that the need for autonomy arises due to the political business cycle, where electoral outcomes may have real effects due to changes in policy preferences.16 This in turn becomes the basis for worry about financial market instability and its related consequences. The IMF with its concerns for financial market stability argues for independence for the authority with clearly defined financial objectives. The problem is that autonomy of monetary policy is closely linked to the degree of autonomy prevalent in the framing of fiscal policy. Thus if the state wishes to be able to maintain the ability to run fiscal deficits it will also be required to run an accommodative monetary policy. It may be noted that the recent advisory group reviewing fiscal and monetary policies emphasised the need for a tight regime of fiscal discipline before one can give autonomy to the monetary authority.17 Traditionally the fiscal authority of the state has needed to work closely with the legislature since taxation and the provision of public goods are both classically legislative decisions. So the question of separation of the monetary and fiscal authorities is also about what critics like Stiglitz would term as a loss of democratic control.

    Other dimensions of independence relate to a assessment of other roles of the RBI, these relate to its status as a banker to the central and state governments and a regulator of the banking systems. Thus in a recent article Chandravarkar (2005) argues the need to insulate the banking and regulatory functions of the central bank from political imperatives. At one level one may argue that this is talking about separation between different wings of the executive. However it may be noted that there is another dimension to this as well

    – relating to the separation of the central bank authority from political (legislative?) interference. Unlike the functional argument on the role of monetary policy this argument is based on an institutional perspective. The resolution of these puzzles we would suggest is as much in the realm of theory as in the appreciation of importance of the doctrine of separation and the constitutional framework of governance.

    III Concluding Remarks

    The three cases presented reflect a certain interplay suggested in the third section of the paper .The concern with such interplay is not regarding the substantial intent of these institutions, i e, to adjudicate insolvency cases, to encourage competition and engineer monetary policy, but rather their design, keeping in mind the constitutional schema and the norms such a schema seeks to perpetuate. Thus it was suggested that insolvency tribunals constructed to encourage executive over-delegation could lead to the social costs associated with structural and/or functional violation of the doctrine of separation of powers – too much power with executive and too little ability to provide crucial judicial processing of information in the event of disputes. While this may make for

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    “speedy” decisions, both the structure and functioning of the tribunals also reflect a breakdown in the process of inter-institutional bargaining. It is again this inability to embed the inter-institutional bargain within the confines of the doctrine of separation powers that causes one to critique the Competition Act, 2002 as an inappropriately structured law. If indeed such law remains insensitive to the doctrine of separation of powers, it is likely to generate its own social costs. The crucial point of these examples is to highlight the role played by the doctrine of separation of powers and the importance of inter-institutional bargaining. This failure of dialogue across institutions and an incoherent appreciation of the doctrine has become one of the key impediments to reform.




    [Earlier versions of this were presented in a conference on Regulation at the Centre for the Study of Law and Governance JNU and the annual meetings of the Canadian Law and Economics Association in 2004.]

    1 This idealisation, of course, changes in a globalised setting where at times reference is made to a higher code governing the conduct of nations.

    2 We follow Allen’s definition of transaction costs as the resources used to establish and maintain property rights [Allen 1999].

    3 To briefly describe these specialisations – the representative legislature captures the aggregated preferences of the voting population and makes laws keeping in mind the impact on distribution of such legislation. The executive which executes the will of the legislature, often making technical decisions in the face of incomplete information, drawing on scientific, epidemiological and statistical studies, can be viewed as a hierarchical body that makes decisions in the face of incomplete information. The judiciary resolves disputes keeping in mind procedural, statutory and constitutional limits. Since judicial decisions necessarily need to be perceived as being fair, judicial information is gathered from contesting parties in conformity with rules of evidence and procedure, and since evidence comes in from conflicting sources, courts can typically be thought of as processing imperfect information. It can therefore be argued that an allocation problem facing the state would be ideally slotted for resolution in the appropriate branch of the state. Thus, a contest over a jointly produced surplus should appear before the court because the precise amount contributed by a party is private information, which the court translates into verifiable evidence given by each party and makes an assessment of the apportionment. The executive would process a famine because statistical, scientific and epidemiological data needs to be processed to assuage the uncertain affects of the famine. If it is accepted that the diktat of the law is essential for society to function as a cooperative endeavour, then laws need to be made by an agency of the population at large that is presumably sensitive to the distributional impact of these laws across the population – a role fulfilled by the legislature.

    4 ‘Report of the Standing Committee on International Financial Standards and Codes’, Reserve Bank of India.

    5 One of the authors was a member of this group.

    6 ‘Report of the Arrears Committee’ (Malimath Committee) (1989-90) as quoted in L Chandra Kumar vs Union of India (1997) 3 SCC 261.

    7 L Chandra Kumar vs Union of India (1997) 3 SCC 261.

    8 Union of India and Anr vs The Delhi High Court Bar Association and other, Appeal (civil) 4679 of 1995.

    9 In fact there have been nine constitutional amendments in the past four years. 10 Union of India vs Delhi High Court Bar Association (2002) 4 SCC 275. 11 Thiru R Gandhi vs Union of India, Writ Petition No 2198 of 2003, High Court of Madras.

    12 This PIL has subsequently been disposed of on the assurance by the government that it will make suitable amendments to the law (Writ Petition (civil) 490 of 2003, order dated January 20, 2005). However the Supreme Court has made it clear that the matter can be raised again if the amendments are not satisfactory.

    13 For instance in the Competition Act, 2002 this is performed by stating: 3 (1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

  • (2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be void. 4 (1) No enterprise shall abuse its dominant position.
  • (2) There shall be an abuse of dominant position under subsection (1), if an enterprise.
  • (a) directly or indirectly, imposes unfair or discriminatory
  • (i) condition in purchase or sale of goods or service; or (ii) price in purchase or sale (including predatory price) of goods or service,
  • (b) limits or restricts
  • (i) production of goods or provision of services or market therefore; or (ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
  • (c) indulges in practice or practices resulting in denial of market access; or (d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or (e) uses its dominant position in one relevant market to enter into, or protect, other relevant market.
  • More broadly, for an analysis of this aspect of the law, see Bhattacharjea (2003).

    14 OECD(1997), ‘Judicial Enforcement of Competition Law’, proceedings of a seminar on Judicial Enforcement of Competition Law. OECD/GD(97)200.

    15 See Chandavarkar (2005) for a detailed discussion of these issues.

    16 See Kydland and Prescott (1977) ‘Rules Rather than Discretion: the Inconsistency of Optimal Plans’, Journal of Political Economy, also Alberto Alesina (1987), ‘Macroeconomic Policy in a Two-Party System as a Repeated Game’, Quarterly Journal of Economics.

    17 ‘Report of the Standing Committee on International Financial Standards and Codes’ as well as the ‘Report of the Advisory Group on Transparency in Monetary and Financial Policies’ are available at Also see TCA Anant (2003).


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    Anant, T C A (2003): ‘The View from India’ in Benu Schneider (ed), The Road to International Financial Stability: Are Key Financial Standards the Answer, Palgrave, Macmillan.

    Anant, T C A and Jaivir Singh (2002): ‘An Economic Analysis of Judicial Activism’, Economic and Political Weekly, Vol 37, No 43, October 26, pp 4433-39.

    Berlin, Isaiah (1961): Two Concepts of Liberty, Clarendon Press, Oxford.

    Brennan, H Geoffrey and Alan P Hamlin (2000): Democratic Devices and Desires, Cambridge University Press, Cambridge.

    Chandavarkar, Anand (2005): ‘Towards an Independent Federal Reserve Bank of India: A Political Economy Agenda for Reconstitution’, Economic and Political Weekly, August 27.

    Coase, Ronald H (1964): ‘The Regulated Industries: Discussion’, American Economic Review, May, pp 194-97.

    Cooter, Robert D (2000): The Strategic Constitution, Princeton University Press, New Jersey.

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    Laffont, Jean-Jacques (2000): Incentives and Political Economy, Oxford University Press, Oxford.

    Montesquieu, Baron de (1949): The Spirit of the Laws, tr Thomas Nugent, Hafner Press, New York.

    Perrson, Torsten, Gerard Roland, Guido Tabellini (1997): ‘Separation of Powers and Political Accountability’, The Quarterly Journal of Economics, Vol 112 (Issue 4), pp 1163-1202.

    Padovano, Fabio, Grazia Sgarra, Nadia Fiorino (2003): ‘Judicial Branch, Checks and Balances and Political Accountability’, Constitutional Political Economy, Vol 14, pp 47-70.

    Singh, Jaivir (2004): ‘(Un)Constituting Property: The Deconstruction of the ‘Right to Property’ in India’, Centre for the Study of Law and Governance Working Paper Series, CSLG/ WP/04-05, Jawaharlal Nehru University.

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