Domestic Regulatory Environment
Linkages with Trade and Foreign Investment
Pradeep S. Mehta
Secretary General, CUTS International
16 February 2015
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Scope
Not about processes involved in domestic regulatory framework (DRE) or measures
needed to improve it
Outline

Recent developments

Components of DRE

Effect of sub-optimal DRE

Policy drivers of DRE

Domestic experience

International experience
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Recent developments

Finalisation of Administrative Arrangement to implement India-US 123 Agreement
 Implication: Starting of commercial negotiations for setting up nuclear reactors

Programme for Enhancement of Cooperation in Oil & Gas between India and Russia
 Implication: Joint exploration and production of hydrocarbons

Sub-regional motor vehicle agreement in Bangladesh, Bhutan, India and Nepal
 Implication: Facilitate cargo and passenger movement amongst these countries

Agreement on Trade Facilitation (WTO)
 Implication: Expediting the movement of goods and reduction in trade cost

SAARC Framework Agreement for Energy Cooperation (Electricity)
 Implication: Enabling cross-border trade of electricity
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Components of DRE
Domestic and
international policies,
legislations, guidelines,
and mechanisms
Domestic
regulatory
environment
National and sub-state
organisations, judicial and quasijudicial authorities and processes
thereof
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Effect of sub-optimal DRE

The world FDI inflows have fallen from the high of USD 2.00 trillion in 2007 to USD
1.45 trillion in 2013 (UNCTAD). Growth in world merchandise trade remained
subdued in 2013 and early 2014, at around 2.2 percent (WTO).

Reasons include:
 Economic fragility and policy uncertainty (World Investment Reports, 2013 and
2014)
 Regulatory
and policy uncertainty and deteriorating business confidence,
specifically in case of India (Anand and Tulin, 2014)
 Increase in policy uncertainty, specifically in case of United States (Baker, Bloom,
Davies, 2013)
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Policy drivers of DRE

Domestic policies, legislations and practices:
 Investment regime
 Taxation policy
 Competition policy
 Intellectual property rights regime
 Grievance redressal mechanism

Bilateral and international commitments (influence domestic policies):
 WTO commitments
 Bilateral and multilateral agreements
 Dispute resolution mechanism

Demand driven
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Domestic policies/ legislations: Illustrations

FDI policy:
 FDI up to 49 percent under government route allowed in defence sector, beyond
which approval of Cabinet Committee on Security required for FDI in state-of-art
technology (PN 7 of 2014)
 FDI up to 100 percent under automatic route allowed in railway infrastructure
(non-sensitive areas, wherein approval of CCS required) (PN 8 of 2014)
 FDI up to 49 percent in insurance sector (Insurance Ordinance, 2014)

Taxation policy: Introduction of Goods and Service Tax

Draft National Competition Policy: Adoption of pro-competition principles

IPR regime

Grievance redressal: Quantity and quality concerns
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International commitments: Illustrations

International commitments influence development of domestic policies

WTO:
 Principles
of
non
discrimination,
reciprocity,
binding
and
enforceable
commitments, transparency
 Agreement on Application of Sanitary and Phytosanitary measures: Food safety and
standardisation issues
 Trade Facilitation Agreement

Bilateral/ Multilateral agreements:
 Double tax avoidance agreements
 Bilateral and regional investment agreements. E.g. proposed India-US BIT and
Social Security Agreement, TTIP, TPP
 Relook at BITs
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Policies are not enough

Enabling domestic and international policies, while necessary, are not sufficient, to
attract investment and enhance trade

Appropriate organisations are required to be created to house the policies and
regulations and ensure their implementation

Appropriate processes need to be put in place to ensure sustainability and adaptability
of policies and regulations. Weak processes result in institutional weaknesses

Organisations and process comprise institutional drivers of DRE. Stakeholder
participation is inherent component of good institutions
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Achieving right balance is the key
- Independence
- Transparency
- Predictability
- Cost-effectiveness
- Regulatory capture
- Accountability
- Commercial sensitivity
- Adaptability
- Promptness
- Stakeholder participation
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Domestic experience of DRE
Policy
Taxation
DRE
Reason
Retrospective taxation (Vodafone) and Lack of clarity in regulatory objectives
protracted litigation (Nokia)
and limited accountability
FDI in multi- Absence of investment
brand retail
Power to states to decide respective
policies resulting in uncertainty
Railways
Sub-optimal performance, monopoly No institutional independence and
and discriminatory practices
lack of adequate processes
Electricity
Monopolistic
and
dysfunctional Lack of effective independence and
structure of state utilities
competition
Agriculture
Distortions
in
marketing
and Absence of appropriate tools and
inadequate regulation of intermediaries inadequacy of regulatory processes
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Domestic experience of DRE
Policy
DRE
Reason
Education
Multiple regulators and overregulation
No clarity in institutional objectives
Healthcare
Regulatory entry barriers and collusive Sub-optimal policy making
practices
inefficient grievance redressal
Road
transport
Discretionary licensing, cartelisation Abuse of discretion and absence of
and preferential treatment
adequate processes
Finance
Regulatory arbitrage and preferential Lack of clarity in institutional thinking
treatment
Telecom
Increase in teledensity, improvement in Institutional
independence
availability and quality
adequate processes
and
and
Only 10% of investments actually materialise in India
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International experience of DRE

California: Think Long Initiative – effective public participation in governance

Mexico: Whole of government approach – competition and regulatory reforms, taking
into account concerns of opposition parties. ProMexico – promotion of trade and
investment

Detroit: Land use reforms, disinvestment and privatisation, building institutions and
processes

Australia: National Competition Policy, Regulatory Impact Assessment and systemic
review

EU: Competition reforms in railways and transportation sector

UK: Cutting red tape and One-in, Two-out initiatives
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Thank You
www.cuts-international.org
[email protected]
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