Governance and Regulatory Challenges – Lessons from India’s growth story Suman Bery PMEAC and IGC, India April 20, 2011

Case for Regulation Alternative perspectives: – Competition is wasteful. – Competition is desirable. – Politics must always be sovereign. – Political arbitrariness damages investment – State is a benign, neutral, rational actor – State is partisan and rapacious, strong likelihood of capture

Cycles of Regulation In 20 th century, advanced countries have oscillated between regulation and deregulation Responds to economic performance, income distribution. In US, regulatory phases ; ; followed by deregulation, dynamism, income inequality. Tide turning again

What of India? Dynamic similar. Intervention in 1950s motivated by anti- colonial view that open economy had been bad for both growth and distribution, and that India’s age-old divisions could not be healed by the market alone. Deregulation impulse of 1980s a response to relative stagnation in 1970s.

Where are we now? Deregulation partial, cautious, largely successful. Has raised investment share of private sector. Productivity data suggest that in general this has been relatively efficient investment. Domestic environment increasingly reflects international relative prices.

What are the issues? Freedom of entry with unresolved issues of exit is storing up problems for the future. M&A regime, diverse financial system both critical for hostile take-overs, market-driven consolidation. Increased concentration of wealth is largely unavoidable but points to large rents available for distribution, likely to generate backlash.

What are the issues? Interface of regulatory framework with political system, bureaucracy still being worked out. Regulators not adequately shielded from political capriciousness.

Way ahead Regulation (and regulators) succeed if there is broad political consensus that contentious issues are best handled at one remove from daily administration and politics. We are some distance from achieving the necessary professional capacity and jurisprudence. Will ultimately be driven by the need of the private sector for stability and predictability.