Renuka Sane on Regulatory Frameworks, Rule of Law, and Pensions Reforms in India

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SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. 

Today my guest is Renuka Sane who is the managing director of Managing Director of Trustbridge. An institution that seeks to improve India’s business environment by improving the rule of law. Renuka was a member of many expert committees including: the Task Force of Experts set up by the Employees Provident Fund Organisation; the research team of the Bankruptcy Legislative Reforms Commission; the Pension Advisory Committee of the Pension Fund Regulatory Development Authority; and the Working Group on personal insolvency at the Insolvency and Bankruptcy Board of India. She received a Ph.D. in Economics from the University of New South Wales. 

We talked about the old, new, and unified pension scheme and related reforms over the last few decades in India, India’s broader financial regulation framework, separation of powers in regulatory authorities, the way regulatory orders are written, and much more. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Renuka. Welcome to the show.

RENUKA SANE: Thank you, Shruti. Glad to be here.

RAJAGOPALAN: You’re my go-to person for a lot of things—regulation in India, how individual regulators work—but you’re really my go-to person for pensions and pension reforms, which I think nobody really understands. I would love to geek out with you on all things related to pensions. 

India’s Pension System

Before we go down that path, for those who are unfamiliar, can you just lay out the broad contours of how India’s pension system works and who it touches? My understanding is there is, of course, a narrow group, which is the civil services and government employees. Then there is the private sector with a different set of options. Then there is a vast informal sector, which for the longest time had none of these opportunities, and now slowly, mechanisms are being brought in for those people also. Can you just give us the lay of the land before I start asking you very specific questions on the different pension schemes we have and what reforms we need?

SANE: Yes, sure. When we think about pensions, we are generally thinking about how to finance consumption in old age. We are all going to retire. At least those of us in the formal sector are going to retire at 60. Because of increasing life expectancy, we are going to live for 25, 30, 40 years more. Whatever money that we can save now has to be built up such that it can then be drawn down in those years where we don’t have work and we don’t have any other source of income.

That’s essentially the idea of having any kind of a pension. Now, the question is where is this money going to come from? Either the government pays this money and says, “Look, you are working. When you hit 60, 65, you pick a number, and I’m going to use current taxpayers’ resources and give the money to the older people. All those who are working pay X percent tax. I collect this money, and then I go give it to everybody who is old.” That is typically how pensions are thought of in other parts of the world, till we started running out of money, and till we realized that actually, because of the demographic transition, there are many more old people and very fewer younger people to actually finance this. Funding of these kinds of pensions became a problem. 

That was true in the case of India as well. Earlier, for civil servants only, you had this taxpayer finance pension, which promised you that on retirement, you will get a certain sum of money and, for however long you live, we would give you this kind of a payout. And this would be financed through taxpayers’ resources. It’s an element of public finance. That’s really how we have thought of pensions traditionally. 

This, like I said, began to be problematic because it’s hard to find the money to do this. Pensions started now becoming, what we call, defined contribution funded programs, where we force you to save money in some account, and that money then grows over a period of time. We force you to lock that money into that account so we don’t let you touch that money. Then, at the time of retirement, there are various ways in which you could draw down that money. That’s the essence of a pension system.

Of course, you will argue that all of us save money. Whether you save it in an account that is called pension or not is irrelevant because what matters is how do you finance consumption in old age and by the time you are 60, 65 or ready to exit the labor force, do you have enough wealth that will last you for the rest of your life? What we have done and what the world has done has said that, “oh, but people are myopic, and so we’ve got to force them to save money in some account called a pension account.” In India, we do it through the Employer’s Provident Fund, or we do it through the NPS. By and large, these are the two main products that are available, and we force people to put money there, and then that money grows, and then we let people take a lump sum, or we force people to buy an annuity so that there is some money left for retirement. 

That’s, in effect, what we mean by a pension system that it is mandatory, it is illiquid, and ideally, there should be some sort of a drawdown policy around that. Of course, you could just take it as a lump sum as we do in some schemes that the day you retire, whatever is in your account becomes your pot of money, and now you do whatever you want with it.

Alternatively, we force you there also to not take the money in one go, and we stagger it over your lifetime so that the money lasts for your lifetime. That, in a sense, is really the idea of a funded pension system or a defined contribution individual account pension system that we are all forced into saving money for our retirement.

RAJAGOPALAN: This is super helpful. The defined benefits, which was the old system, versus the defined contributions: My sense is the core idea is the same. What are we really trying to solve for? We’re trying to solve for dignity in old age, eliminating old age poverty, consumption smoothing, removing these kinds of social problems that’ll emerge if there’s a large number of people who are left without means. The risks that are there are different in both cases.

When we’re talking about defined benefits, it’s basically a question of fiscal sustainability. It’s a question of the political economy of who is paying for what. Then you have a very large young population, which needs to pay into a pyramid scheme of sorts for what is the older population, you need to take from one group, and you need to give it to another group.

If we switch it to defined contributions, then the risk is a little bit different, which is now there is going to be a fund where you’ve contributed your entire life, but that fund is going to rely on markets, and we don’t know what happens to markets, and we don’t know when someone will retire in the business cycle, whether those funds are being appropriately managed, if they’re being appropriately regulated. There is a political economy problem on that end also that you can’t just say, oops, something bad happened, global financial crisis, COVID, and leave someone with an empty bag or with a shallow bag.

Is that the appropriate way to think about the two different risks? One is fiscal sustainability at the government level, and the other is how much risk can we impose on an individual, given that they have very little choice in how the system is designed and they are forced to pay into it, but there may still be a chance that they don’t get the amounts that they are hoping for.

SANE: Yes, absolutely. I think that’s a very good framing where, in the defined benefit system, the risk is on the government or the employer. If the employer is the one providing the DB system, here the investment risk is pretty much on the individual. That’s absolutely right. I’d just like to point out that while most of us think that when governments pay, it is pretty much riskless, even as an employee, that the government is never going to renege on your pension, but that’s not always true.

We don’t measure that risk appropriately because defaults don’t happen that often and don’t happen in such a binary way as zero or one. There are many number of events, even within India, where governments have delayed pensions, so a lot of people don’t get their pensions on time. Certainly, if you are lower down the bureaucratic order, many states have reneged on pensions. Many states just pay pensions later than when the money is due. Many states in the rest of the world also renege on promises by later changing the retirement age, for example.

When you are 25, you are told that the retirement age is 60, but by the time you’re 55, you’re told that, “oops, now it’s 68.” Of course, in places like France, you can have riots on one or two years of extra work life, which, really, it’s very amusing to see that when you’re sitting in India. But nevertheless, it’s not as if government systems don’t have any risk; they do. We just don’t measure it well, and we don’t see it well. It actually hits us when we are 75 and 80, and pensions are delayed, and are we going to run pillar to post to get that money? Of course, it doesn’t happen all the time, so I concede that.

RAJAGOPALAN: It’s funny you say this. When I joined State University of New York, the first person you meet is the HR person, and they walk you through all the benefits. It was the first time I was getting vision and dental insurance and all. It was my first real job. I was almost in tears and feeling thrilled. Then she asked me to fill out the retirement paperwork, and there was the option of defined benefits. SUNY was still providing defined benefits pension scheme versus defined contributions. I picked defined contributions.

She looked at me and she said, “Are you planning to leave in a couple of years?” I said, “No, I’m not. It’s a tenure-track job. Why would I leave?” She said, “Why are you picking defined contributions as opposed to defined benefits? It’s the stupidest thing you’re ever going to do.” This is a very generous pension scheme. At which point I was like, “I don’t have faith in the New York state system to actually pay me by the time I age.” She literally looked at me like I was insane.

I guess I was cracking a cute economist joke, which did not land well. She thought I was totally irresponsible. Obviously, economists study these tail risks. We know about these defaults. We know when municipal governments and state governments and pension funds default. I guess it’s very salient in our mind in a way that it’s not salient in a regular person’s mind. When you were talking about that, I was literally reminded of my own life. Eventually, I got tenure, but I did leave SUNY, so the defined contributions worked out great for me, but just putting it out there.

SANE: I think defined benefit pensions also lock us into labor force choices that may actually not be good for us. Once you’re locked into that kind of a system, you don’t want to leave because maybe your vesting period requires five years more, and then there’s the next five years for something else. Whereas a defined contribution system does give you the flexibility to make better labor force choices. Coming back to investment risk, yes, there is investment risk in defined contribution pensions. There’s no doubt about it.

There are a couple of ways in which that can be mitigated. Many systems offer those kinds of design choices where these risks can be mitigated. For example, you could just reduce your exposure to equity as you age, and you could be in more fixed-income instruments as you age, so that if a financial crisis hits, you’re probably not going to face a big shock around the time of your retirement. Then there are things like passive investment choices. Instead of doing active investment, you could do passive investment. That tracks the broader index, and it’s likely to give you higher returns, net of cost, and active investments. At least that’s what the literature from the OECD countries shows us.

In India, there is still some sort of a debate on whether active is better than passive, but we haven’t had that many years of a mutual fund industry to actually be able to calculate net of costs, or whether active is better than passive. Across the world, where you’ve had these systems for many, many decades, you know that passive investment does better. There are all of these kinds of things that you could do to mitigate investment risk.

I think one point that none of us appreciate that much is that there is no such thing as a free lunch. If you want guaranteed returns, then you eventually have to pay for it one way or the other.

RAJAGOPALAN: Someone has to pay for it.

SANE: That’s right. Someone has to pay for it, or you, as a taxpayer, eventually ends up paying for it. You don’t measure how you are paying for it, but it’s there. In India, for example, we love guaranteed returns. Whether you look at EPFO [Employees' Provident Fund Organisation] or many other schemes, the ones that do well is where you’re told you’ll get 7% guaranteed return or 8% guaranteed return, as opposed to a market-linked scheme where you don’t know what you’re going to get. What you’re paying with there is the lack of an upside because when times are good, you are absolutely foregoing the 12% that you could have gotten year on year for a guaranteed 8% return.

Now, that may still be a reasonable choice for some people to make, for whatever your risk preferences are and wherever in life that you may be. I just don’t think that any of us are thinking in that way. Certainly, people in the lower-income groups are thinking that way because the price of the guarantee is not made explicit. Therefore, there is just such a fear about the worst-case outcome on the bad side, without looking at the best-case outcome on the good side.

I think that we make a mistake in focusing too much on the investment risk by, A, not showing that there are alternative ways to deal with it, and B, not making the price of the guarantee more explicit, because once you did that, you would know that this is not free and that you are actually paying for it. You might be more in a place where you could make this choice more rationally.

RAJAGOPALAN: Yes. Earlier in India, if I had to just do the blunt version of it, government employees were largely in defined benefits category, and private sector, earlier in the ’50s started out as defined benefits, then they were much quicker to switch to defined contributions. 

SANE: No. I think we got the EPFO in the ’50s. The EPFO is a defined contribution scheme. It is mandatory for those in firms with 20-plus people in certain sectors. It has some wage thresholds where it applies to people below a certain threshold. It looks like defined contribution, but it is not in the sense that the returns are guaranteed. It’s not defined benefit because it doesn’t tell you that you’re going to get, let’s say, 50% of your last wage drawn as a pension, but it is not a pure defined contribution because you do get a guaranteed rate of return. It’s somewhere in the middle.

Then we started with the employees’ pension scheme, which is a defined benefit component of that entire package. Then that is defined benefit. I think that one doesn’t know how much trouble it is in.

RAJAGOPALAN: Yes. Now, in this world, that was the earlier, let’s say, government sector is almost entirely defined benefits. The private sector has this mix. Overall, there’s a tiny fraction of India that works in this formal white-collar world with all these benefits. We’re talking single digit within the employment force. 

Two questions here. Why has the government pension scheme dominated the conversation so much when it’s such a tiny fraction, and 98% people are outside of that scheme and may have no retirement benefits or contributions defined? There’s nothing going on there. Why is this so big in terms of taking up space in economists’ mind? Is it just a question of how big the fiscal outlays are, or is there something else going on there?

SANE: Yes. I think that in the early 2000s, when we were making the change from the old pension system to the new pension system, it was big because it was really costing a lot of money. 

In the early 2000s, we were spending almost 2.5% of GDP on just pensions. Now, for a country like India, that’s a pretty large number.

RAJAGOPALAN: That’s huge.

SANE: If you calculate the implicit pension debt, it was almost 60% of GDP, which is the net present value of all the future payments to date. These numbers were beginning to look very bad in the early 2000s.

RAJAGOPALAN: This was for less than 1% of the workforce, just to put it in context. It’s an enormous fiscal burden for a very tiny fraction.

SANE: That’s absolutely right. Many states were actually in a lot of fiscal trouble at the time and were unable to pay their salaries and pensions on time. When I was talking earlier about governments reneging, it has happened, not so long ago that people’s pensions weren’t paid on time, or governments reneged. At that time, it was felt that we should do something about this fiscal burden and that we should move government employees from the defined benefit pay-as-you-go system, as it’s called, to something where it’s defined contribution, where the funding burden does not fall on the government. Of course, the government is paying 10% or 15% now into the employee’s account. That’s where it stops. I’ve made the contribution, and then it’s over. I’m not taking the burden of the longevity risk on myself. That’s why it became big at the time. 

It’s become big now because government employees, while tiny, do have a loud voice. They are able to comment on whatever they don’t like and bring about change. Though it’s not very clear to me whether this feeling of unhappiness on the NPS [New Pension Scheme] is pervasive, or it is amongst a few more vocal groups within the larger community of government employees. One doesn’t know that. Certainly, there was a lot of noise in the last couple of years and a lot of unhappiness about the NPS and about not having any guarantees on the pension. 

RAJAGOPALAN: NPS, basically there is a defined contribution scheme. It all goes into a managed fund, right? You can annuitize a portion of it and take out a portion of it in lump sum. Is that about the rough design of it?

SANE: That’s right.

RAJAGOPALAN: Now, within this, I assume they were upset about the annuitized portion, that there isn’t a floor for it, right?

SANE: I think it was a little more than that. One is that there was no guaranteed return. NPS was entirely market-linked, and so earlier it was 10% of government’s income, which was later increased to 14%, was put into your pension account. This money was managed by three public sector pension fund managers. It was your account. It was not pooled. Then that would grow. At the time of retirement, whatever your accumulation was, you had to annuitize 40%. You could take 60% out as a lump sum.

Now what happened was that because all of the government employees were actually in these public sector PFMs, pension fund managers, and there were far stricter investment guidelines on them, in the sense of the amount of equity exposure they could get, I think that the returns that they got in the earlier years were not as great as we would have expected. People then began to worry that when you retire, you would not get 50% of your last wage or 50% of your last 10 years’ average. Therefore, that amount would be lower than what you would have gotten if you were in the old defined benefit plan. This was one. I think the other big issue was that government pensions, the older ones, are inflation-indexed.

RAJAGOPALAN: Yes. The pay commission keeps revising that.

SANE: Pay commission keeps revising that.

RAJAGOPALAN: That number only goes up. It never goes down.

SANE: Exactly. Exactly. Whereas in a market-driven system, it is very expensive to buy an inflation-indexed annuity if you get one. It means that, even if you were somehow able to get 50% of your last-drawn salary as pension because your NPS investment account did very well, there was no way in which you were going to match the inflation indexation that a future pay commission would give you. I think that was the other reason that a lot of government employees—and I guess if I was one of them on this topic of inflation indexation, I wouldn’t mind a good inflation-indexed annuity myself.

RAJAGOPALAN: I have a question here. In 2004, when the NPS was actually introduced, I can understand if people were really upset about it from 2004 to 2014 because we’ve had Global Financial Crisis, Indian markets are not as sophisticated yet, we don’t have the inflation targeting policy yet, we don’t have the MPC [Monetary Policy Committee]. We were all over the place that time. Now it seems like our markets are much more sophisticated. The mutual fund market’s absolutely booming. We finally have inflation targets. Our inflation is very much under control within the bands. The NPS has done a pretty good job.

It feels strange that the complaints are coming now. Is this really about inflation indexing the annuitization, or is this just people getting greedy and saying, “My grandparents got something else, and I’m getting something else”? It just seems a very odd choice because these are also civil servants. They know how bad the fiscal situation is. It seems bizarre to want to go back to the old pension scheme.

SANE: I think that two things happened, which is that when the NPS was started in 2004, if you joined service then as a young person, you would not have retired by now. There are still some years to go before 30, 40 years get over. However, if you joined the NPS when you were 40, for whatever reason, you joined service then or you were a contract worker, but then your position got regularized as they say, then you were already 40 and now you are at the end of that cycle and actually in 20 years you haven’t accumulated much.

For all these people, I think the NPS was a bad experience and I think this is a design failure that you should not have let people who don’t get 30, 40 years in the system and don’t get enough time to actually accumulate that kind of money in their accounts, because, really, investment wealth is a question of compounding over long horizons. If you don’t get those long horizons, then you are not going to get adequate wealth in your pension account. I think there was a little bit of disappointment on that front.

I think there was also some disappointment around what happens if an employee dies while in service. The old rules were, I think, quite generous in what the family got if the person died while in service, whereas I don’t think that the NPS design had thought about that adequately. Then, again, I would argue that that was a very easy solve. The government could just have bought group life insurance for all its employees. As a big purchaser of insurance from any of these insurance companies, it could have gotten very good rates, and that group life insurance would have solved for this problem.

I think some of it was design failure and not enough attention being paid to the problems of NPS as it was evolving because all of these are things that you learn over the 10, 15 years where it played out. Of course, the poor investment choices in terms of just sticking to just government bonds and not letting people enjoy the benefit of the equities—in the earlier years, the equity markets did so well, and all of the government employees did not get anything out of that pie.

Some of these design choices did go wrong, and you had disappointment amongst those who were at the receiving end of the NPS situation. I think that’s one reason why this became a big deal. The second reason why this became a big deal is that many state governments were going into elections, and this got used as one way to get the government employees vote to say, “Look, I’m going to give you back this generous pension.” Again, it puzzles me why government employees—

RAJAGOPALAN: It’s such a tiny group.

SANE: —why that group is so important from a votebank perspective is something that I haven’t quite understood. We need to talk to a political scientist, I think, to figure out what’s going on here. That’s where we are. It really became a political issue when many state governments started to go into elections. I think Himachal Pradesh, Punjab, perhaps a couple of others, did announce that they were going to go back to the old pension system. They did announce that for their state government employees. Then this became an issue with the Union government employees as well. The puzzle is that they’ve now gone to this scheme called a unified pension scheme, which is neither NPS and not OPS.

I just want to make one point, which is that if government employees were so anti-NPS, why haven’t many of them switched to the UPS [Unified Pension Scheme]? I think that’s again a puzzle in front of us, but we can talk about that later.

RAJAGOPALAN: When I look at your papers, you did one paper with Ajay Shah in 2011, then another one with Susan Thomas in 2014. If I read the two papers together, basically, you’re telling us all the design issues with NPS, exactly what you pointed out, which is it was too tight as a regulatory system. It never gave them the upside. It gave them very little control, which meant you’re neither relying on the government, nor are you getting the benefit of the market in some sense.

When I look at the second paper, it seems like NPS is still overall a pretty good idea. We just need some minor tweaks and reforms to figure this out. First, am I reading the two papers correctly?

SANE: That’s absolutely right. Yes.

RAJAGOPALAN: Now there’s a third part to it, which is exactly what you’re talking about, which is this unified pension scheme. Now, this unified pension scheme gets us most of NPS, but also some of the old pension scheme systems in terms of guarantees and backstops, and so on. First of all, that doesn’t seem like the reforms you guys suggested. What is it that they were thinking when they did the unified pension scheme? What are these people smoking? It seems bananas to me.

SANE: You have to ask them that. I think that it is a way to continue with the benefits of being in some sort of a market-driven scheme, but with providing a floor. That’s where you’re promising 50% of the last-drawn salary or the last 10 years’ drawn salary. You’re giving a 50% replacement rate, and you are giving inflation indexation because you’re saying that the pension will increase through the pay commission increases on Dearness Relief or Dearness Allowance. I think that’s the puzzling part of it.

RAJAGOPALAN: Now you’re back in the fiscal mess. That’s the crazy thing. Exactly what you wanted to avoid, you’re back in it.

SANE: Yes. What you’re doing is that you think that you are going to avert this fiscal mess because you still have this 10% of the employees’ contribution, and now it’s 18% from the government that is going to be invested in a pooled account and an individual account. Somehow, this money is going to be enough to pay that pension when the time comes. That’s the hope.

As we know from past experience, that even though this is slightly better than just taxpayers’ money going from one place to another, many of these schemes actually do run into trouble as time goes by. We do run the risk of having a big hole in the UPS funding structure as time goes by. We’ll find out over the course of the next 20, 30 years. Though, like I said just a minute before, that as of now, not many employees have switched to the UPS. They were given a choice to move between the NPS and the UPS, and very few people have actually switched to the UPS.

Is it because they’re waiting it out to go back to the full OPS? Or that they think that the UPS is somewhere in the middle, you might as well stick with a cleaner NPS-type pension system? I don’t know. Is it that the deadline keeps getting extended, so when it’s the final, final deadline, suddenly you will have a whole bunch of government employees moving towards the UPS? Again, all of these things are things that we are going to find out over the next few years and decades.

RAJAGOPALAN: Yes. This is the looming problem because it’s just so expensive, and it’s a political economy problem. My sense of why the state governments are so eager to push this—I don’t think it’s votebank politics; they’re too small a group, and I don’t think they’re enough to swing the vote, and they don’t vote in a unified way. I think it’s because they are worried that the business of government would just stop without the government employees. Every other voter promise that they are making is going to be in deep trouble if these guys go on strike, and these guys just basically refuse to cooperate. They need them. That’s my public choice 101 read of the situation, but it seems quite bizarre to cater to this group.

SANE: Yes, I have two responses to that. One, if that were true, why aren’t more people moving? Why do we not see people switch to the UPS? What is this demand against the NPS then really about? We need to find that out a little bit more. I think for some state governments, I can imagine that they had a lot of people who are the old civil servants in the old pension scheme, so you were paying pensions for them, and for the new guys, you are also paying this contribution rate in the pension account.

In some ways, the burden on the state government today, until all of the old people retire, is pretty high because now you’re bearing the burden of both these systems. Whereas once the old people retire, then you only have the NPS—

RAJAGOPALAN: When you die. Not retire, right? Die. Sorry.

SANE: Yes, that’s right. Yes, and their spouses too, because you do promise family pension.

RAJAGOPALAN: We need a large number of people to die to make this feasible.

SANE: That sounds really horrible to say, but yes. I think that that fiscal burden probably became a bit much for state governments. Many of these state governments—I think Rajasthan is well in that list—that moved from the NPS to the OPS, were state governments that had fiscal trouble. Maybe this was one way to save the money on the NPS at the moment, don’t contribute, and when these people retire, we’ll see whoever is governing at that time. It’s their headache, not ours. That is also public choice 101 in some way, right?

RAJAGOPALAN: Yes, absolutely.

SANE: That it’s not my problem; it’s the next person’s problem. That probably also explains why many state governments just made that switch.

Private Sector Pension Schemes

RAJAGOPALAN: Yes. Here, now if we move away from the government, which again, takes up a lot of noise and room, but is a tiny fraction and is very costly, you’ve also looked at how do we expand the private sector pension and benefit scheme that we’re talking about. Because the private sector, which is formal and white collar, is still pretty small. Then you have your paper with Susan—this is your JDS paper—where you’re talking about how to think about a much wider participation.

Here, my sense of how you’re approaching it is, this is virgin territory. We can design this ground up because we still have this huge pool of informal labor, and they’re barely getting wages, let alone getting retirement benefits. There is a way to design this system smartly and sustainably in a way that their benefits are portable, that they can actually use them when they need to, without being an enormous burden on firms. Walk me through that design. What is a good way to think about inclusion where the bar is not so high that they’ll automatically get excluded and remain informal, but the bar is not so low that it stops mattering?

SANE: Yes, I think my views on this have shifted a little. In 2015, when we were doing this work, the government of India had started a co-contribution scheme so that anybody can open an NPS account. If you were in the informal sector, and informal sector is defined through certain thresholds, if you put in 3,000 rupees in a year, then the government would put in 3,000 rupees for you for the first three years. That was what was promised.

These small sums of money over time can actually lead to a reasonable amount of wealth. In this way, you are able to capture those that are above poverty line, and so can save some amount of money, but are not rich enough to be employed in the formal sector, as we define it, and then become part of one of these other systems. Now, our sense at that time was that once you give these co-contribution-type incentives, then many people will participate in these programs. That’s what our data from the early experience has shown us, and that’s the JDS paper that you’re talking about. That, yes, this is possible, and this can lead to good outcomes. We were looking at persistency of contributions. 

If I’m a poor informal sector worker, and I put in money for one month, and then maybe life takes a bad turn the next month, so do I put in the money, or do I just forget about this? Am I able to be persistent with my contributions? Maybe one year was a bad year, but do I come back and put in money when times are good again? We did find that there was some continuity where people were coming in to put in money into their pension account. That was what my thinking was then.

Where I have shifted my position a little bit today is that this is incredibly expensive to do. One way in which you get in the informal sector to put money in their pension accounts is this retail channel of customer acquisition. That’s where I think that it becomes problematic, because any retail channel to get customers is a very expensive channel because fund managers then have to start going and doing advertising of these kinds of schemes, and then you have to pay large incentives to intermediaries who have to go and convince you and then collect money from you year on year.

Suddenly, then this becomes like any other mutual fund or insurance scheme where you have this large numbers of intermediaries trying to get money from retail customers. I’m beginning to think that that is too expensive a proposition. If you want to do pensions on scale, the way to do it really is to find some wholesale participation. You can’t go to every single individual household and then try and convince that household to put money in pension accounts because then it’s not sustainable.

What you need to do is to find some organizations where you will get bulk membership. You go to some unions, or you go to an Uber or an Ola, and then all drivers just get onboarded at the same time. Then it’s their account, and they manage it, but the onboarding and the customer acquisition costs really go down. I think until you are able to do that, I’m a little skeptical of how much you can get done through this route, and more importantly, how much should you get done through this route? Because this is very expensive.

We’ve seen a lot of consumer protection issues in other sectors when you have an intermediary-led financial inclusion model, and that’s not a good thing to happen to pensions. This assumes that unless you save money through an account that is called a pension, you are not doing anything for your retirement, which may not be true because people have different ways of thinking about how they will finance consumption in old age. Maybe everybody’s saving in gold, and we might think that that’s not a very optimal way to save, but it’s not that people aren’t doing anything. 

An inordinate focus on pushing savings through something called a pension then takes away attention from the fact that there are multiple ways through which wealth can be built up. If pensions are becoming very expensive to do onboarding and to get people into these accounts, perhaps we have to think differently about it and start to measure what people are even doing with their retirements. For example, in India, you know that it might be more useful to save in your children. Returns to human capital might be higher than returns to gold or some fixed deposit. 

RAJAGOPALAN: Or to buy a house—

SANE: Or to buy a house.

RAJAGOPALAN: —because that’s the one thing that becomes very difficult in the old age.

SANE: Exactly. I think that today, if you look at most of India, it is not that old people are living on their own and taking care of themselves. This is a very elite urban phenomenon for most of India, and whatever little I have seen in the household data, most elderly folks live with their children. It’s the kids that are financing your retirement, and so you financing their education to get them a good job may not be such a bad idea, or may not be such a bad investment choice.

RAJAGOPALAN: It’s a centuries-old investment choice, right?

SANE: Exactly, especially when you are in that income bracket. I’m beginning to say that, look, we shouldn’t push the retail pensions model too far because we will end up with the same consumer protection issues that we have ended up with in insurance and mutual funds. The industry will probably then just try and get to those people who have money, and the informal sector may just get left behind anyway, and we need to broaden our idea about how we are thinking of financing consumption in old age.

RAJAGOPALAN: It’s also you raise a really interesting point. There’s a lot of this cute nudge economic stuff, which is this cute behavioral economics, behavioral finance. How do we get people to start saving in bank accounts and avoid usurious money lenders, or put in pension schemes by giving them incentives? The thing that the micro experiments always miss is how costly this is to do at scale. That’s exactly what you point out, which is you can do this cute nudge lab experiment, and the moment you scale it to population size, it’s now an administrative nightmare without the benefit. The nudge economics is not costless at all.

SANE: Absolutely. One must worry about the slight possibility that the nudge is a wrong nudge.

RAJAGOPALAN: That’s a very big possibility. I think we should more than worry about that.

SANE: I know. You know how I meant it, that everybody who thinks that the nudges and the behavioral economics is the way to go is not worrying adequately about what if I am wrong about the nudge. Where is this faith in the designers of the nudge coming from? I think that worries me, and that bothers me quite a bit. Of course, there are rules of thumb that are always very useful. I think I would invest my money in rules-of-thumb-type of financial literacy, where you give out this information to people and let them make their own choices. I’m not a big fan of going too far with the nudging and those kinds of experiments.

RAJAGOPALAN: I guess here I would ask you, because you’ve done work both on India and you’ve also looked at this global comparative literature, on how do we think about inclusion? In this sense, is India not at that point of development yet where we start worrying about inclusion of this level? Should we just say, “Hey, let’s get our people employed and let’s give them opportunity. Don’t worry about nudging them into cute pension schemes,” or is it something else? Are we missing the boat on what India could do at its current state of GDP per capita and also state capacity? Is there some low-hanging fruit that can be picked for people who are in the informal sector?

SANE: I think the first thing that we have to do is just solve the problems in our financial sector so that there can be a plethora of products and choices for the informal sector. What do I know what products are useful to one category of workers versus another category of workers? This idea of a universal product is a little problematic. When we think of inclusion, we’ve got to ask what is the product design that might be useful to different groups of people across the country? Why is it that we are not seeing those kinds of products and instruments? Much of the answer probably lies in financial regulation and how we conceive of products.

I am sympathetic to the regulators that people running away with other people’s money is a big problem. It is very difficult to solve. We’ve seen scams around chit funds, for example, where people just lose their money, and then where do they go? At a local level, it is incredibly difficult to find out where money is being lost, where is it being stolen, and what is really the fraud that is going on, and how do you tackle this?

It’s not an easy problem to solve. I get that. We need to think a little bit more creatively about where on the formal side could you allow for more experimentation in terms of the kinds of products that people are allowed to design and allowed to sell. That sweet spot is something that I think we are missing quite a bit.

RAJAGOPALAN: Here, two random asides. There’s this book called More Than Good Intentions by Dean Karlan and Jacob Appel. They’re very thoughtful about all these RCTs they’ve done in different parts of the world and so on. They tell the story of this flower seller. I think her name is Vijaya somewhere in the south. I forget; I read the book a long time ago, maybe more than a decade ago. She had a routine. Every morning, she’d wake up, she’d go to the money lender, she’d borrow the money. Then she’d go to the wholesale flower market. She would buy what she needed. Then she’d go sit outside the temple and sell the flowers and turn them into garlands and on. On her way home, pay the money lender with the crazy daily, usurious interest rates. Then, on her way, go home and pick up groceries and things like that. 

These people basically sat her down and did the back-of-the-envelope calculations, saying, “You’re paying this crazy amount in interest rate. Don’t do that. We’ll give you some startup money. Then every day that you save in the 6%, 7%, you pay this guy, you can save. In about 40 days, you’ll have the working capital to fund your own little business.”

She hears them very patiently. Then she says, “You guys don’t understand. My husband’s a drunk. If I take any money home, he’s going to drink it away. The only person he’s scared of is the thugs and the goons of the money lender. This works out great for me because on a daily basis, I get to do my job. I have the money, and I have protection from this guy drinking my money away.”

I’m obviously making up the numbers. I don’t remember the example verbatim. It’s like this really sobering example that they give of how these outside people who come in with all these behavioral nudges, they just assume that the person who is saving or investing has no agency and has no clue what they’re doing. If they are paying crazy, usurious amounts to the money lender, they must be stupid or unable to calculate compound interest, as opposed to what she’s doing is very sophisticated. She’s solving a very sophisticated optimization problem. Not just her behavioral problems, her husband’s drinking behavioral problems also. 

That, I think, is what you say about you want to be careful about how we design these things and how we force people in or out. I think it’s useful to sit on that for a minute and just think a little bit about the hubris that these people have.

SANE: Absolutely. I’ll give you one more example. My colleague Manish Singh and I have a paper on household investments in gold in India. We start to look at, why would gold be a good investment for Indian households? We think that at the lower end of the spectrum, gold beats inflation very well. Given that until we had inflation targeting, we were a very high-inflation economy, gold was a great instrument to be in for that reason.

On the richer side, it’s a great diversification instrument because it tracks the S&P. Because we don’t get access to the S&P other than through LRS because of the capital controls that India has. This is one way to get international diversification because the gold price is made in London and not made in India.

RAJAGOPALAN: Exactly.

SANE: Once you start peeling in the layers, you begin to say, “oh, but in a country where you have these kind of capital controls, and you have these kinds of frictions around inflation and access to finance, gold may actually not be such a bad investment.” 

RAJAGOPALAN: It’s done really well in 2025, for instance.

SANE: That’s right. That is the one thing, the one research paper of mine that had some implementable insights. After I did the paper, I went and bought some gold ETFs. I said, “Aat least one paper in my life has actually helped me financially.”

RAJAGOPALAN: It’s funny, I always have this conversation with my mother and my aunts and all, that I’m the first generation of women in our family who buys gold for fun. My actual gold investments are in ETFs. I buy my jewelry purely for consumption and fun, and not as a future investment or a hedge against inflation or something like that. To be able to save in gold ETFs is a good privilege.

SANE: Absolutely right. Absolutely. To have a good, well-diversified portfolio that is not entirely in gold is also a privilege, and all of us should make the most use of it.

Insurance regulation

RAJAGOPALAN: One part was this inclusion-exclusion thing. Now, the second part, which you were alluding to within inclusion and exclusion, is how the rest of our financial markets function, and they’re not that well regulated. All the state capacity and regulatory problems we have in these markets are eventually going to enter the pension markets if you force these unknown instruments for opt-in or nudge or something like that. Can you briefly walk us through what are those problems? What are the regulatory problems we have in regulating existing instruments right now, investment instruments, pension instruments?

SANE: I think I’ll begin with insurance first because that’s where we’ve seen the largest problem. For example, up until almost 2010, ’11, we had these products called—well, we still have ULIPs, but at that time we had the Unit Linked Insurance Plans, which were largely investment products with a thin layer of insurance on them. They had pretty high commissions to begin with. Then they had certain product features which were detrimental to the consumer’s interest.

You had these intermediaries trying to sell these ULIPs to consumers and ask consumers to churn because insurance is also a long-term product. Ultimately, the point of insurance is life insurance and it’s not to actually invest your money. Monika Halan and Susan Thomas and I have a paper where we estimate how much money was lost by consumers because of the mis-selling of these ULIP products. The amount is almost $28 billion in a span of seven, eight years.

After that, there were some changes to the regulations on ULIP products, but we’ve had these endowment products in insurance for a long time, which also merged the investment component and the insurance component. They give you very poor returns, and yet they are one of the largest-selling products in insurance. They have one of the highest commissions and actually are a very bad deal for consumers.

Vimal Balasubramaniam, Aditi Dimri, Olga Balakina, and I have a paper where we show that a term insurance plus PPF actually dominates an endowment insurance product at any age. It’s really a bad place for you to be in, and yet you find that pretty much everybody is there because you have all of these commission rules which incentivize intermediaries to go sell that product that earns them the most commission and is not really in the benefit of the customer.

Now, why is that so? Because there are difficulties in how you have one behemoth called the LIC, and then you have some private sector players. Then, LIC is also very fiscally important for the government, and so it’s very difficult to rock the boat on that front. Financial literacy is a big problem on the other side as well. Insurance is a very good example of the problems of consumer protection in finance and financial regulation in these markets. For a long time, mutual funds were also like that, and then there were caps on mutual fund commissions.

Then you move from a front-loaded commissions model to a model where you get commissions on trails, which then incentivizes the broker or the intermediary to make sure that the person stays in the product because then I, as an intermediary, earn more when you continue being in the product, and then that’s good for you, and that’s good for me, and there’s incentive alignment there. We see that there are some of these problems in many of the financial products that are being sold, and they might permeate to pensions as well if we just do the same kind the retail strategy for pensions.

India’s Digital Revolution

RAJAGOPALAN: Here, now, how do you think the world has changed after 2016? A lot of this work is done a decade ago. We’ve had the Jio revolution. Now everyone has a mobile phone. We’ve had the Aadhaar and the UPI revolution. Everyone and their mother is playing Ludo on their phone. Apparently, India is the largest futures and derivatives market. It’s insane how people are treating markets. It’s almost like gambling tiny sums of money on a daily basis without very sophisticated levels of financial literacy.

Do you think about the inclusion problem differently now? You don’t have to go knock door to door to get people to sign up. Now you can have a gamified version of this. You can have big UPI players involved with some basic incentives to have people opt in. Is there a way of rethinking your inclusion stuff from 2015, now that we’re in 2025?

SANE: Yes, absolutely. In fact, just like when you swipe a credit card, if you have the pipe to your NPS account, you could have 10 rupees per 100 rupees spent or 10 rupees per 10,000 rupees spent that then just goes automatically delivered to your pension account, and similarly through your UPI, every time you make a UPI payment, your 10 rupee top-up could go from your account to your pension account. I think that that is eminently feasible today. At least from a design perspective, I think that’s a great way to go. That said, I would worry about the current frauds in the UPI system.

RAJAGOPALAN: Absolutely.

SANE: Even on payments, we are doing so badly on the question of frauds. We have not been able to solve that problem that I feel, until we manage to get that right, linking it to pension accounts, may lead to some other [issue.]

Me losing money while paying somebody is one thing. But then me losing money when something’s going into my pension account or my pension account. Then there is access to this pension account to others, that’s a higher orders of magnitude problem. I would worry about some of these design things a little bit. Then that goes back to questions around the structure and design of UPI, and then the incentives of the players to do fraud management, the structure of the MDR itself. You start getting into those issues around how UPI is made, who can come in, who can go out. 

RAJAGOPALAN: But they are solvable. It seems like those questions are solvable at a much smaller cost to the exchequer than getting a billion people signed up for anything.

SANE: No, absolutely.

RAJAGOPALAN: It just seems like that’s a better tradeoff now that we’ve built the pipes and the plumbing.

SANE: Absolutely. I think that, in terms of at least pension products and linking to the NPS, that would be the right way to go. The sad thing is that many states have come up with these gig worker products. Even the new labor codes have started talking about pensions for gig workers. The simplest thing to have done would have been to open NPS accounts for them. You’ve got a great system here. You’ve got your pension fund managers.

By getting these gig workers to open NPS accounts would have been the right thing to do. Then you could have thought of these plumbing issues for them. We have not. Some states have gone ahead and set up their own administration boards to look at pensions of gig workers. I think that that’s a terrible way to do pensions. We are not thinking about this clearly yet, though I must say that very recently I heard that Zomato has signed up with HDFC pension. 

RAJAGOPALAN: Gig workers on there.

SANE: They are not workers. 

RAJAGOPALAN: Gig employees. Gig something.

SANE: Gig something because the minute you call them employees—

RAJAGOPALAN: Employees. You run into all the statutory problems.

SANE: Exactly. They are gig people.

RAJAGOPALAN: They are people who take things from point A to point B.

SANE: To point B. There is some movement on that front, and that could be the right way to go. It fits in with what I was saying on wholesale participation earlier.

RAJAGOPALAN: Exactly. Also, I don’t want to minimize your scam issue because I recently read Snigdha Poonam’s book, Scamlands. I think that might be the episode that comes out just before yours. We had a conversation a few days ago. It is terrifying the scale at which insurance scams are happening. Entire villages and cities are involved in the northeast. It’s a little bit terrifying.

I wouldn’t want to minimize the scam element of it. Once scam elements enter something big like the pension scheme, as opposed to tiny chit funds here and there, then you’re poisoning the well. We want to be really careful and thoughtful about how we integrate other systems into NPS basically. It’s still a design issue, I think, that is fixable, relatively low cost, given everything else you’re saying.

SANE: You’re absolutely right, Shruti. I’ll add one more element to this, which is not really about building up investment wealth, but it is about drawdown of wealth. Sure, you’re able to fix this by somehow getting money into people’s saving accounts or pension accounts. What we’ve really got to think about is then how is it that they’re going to draw down this money. Very often, we think that retirement is age 60, 65 because that’s what our employers say. For a lot of people in the informal sector, the idea of retirement is meaningless. It is really an exit from the labor force. 

RAJAGOPALAN: They need the money when they need the money.

SANE: Yes. You stop working when either you can’t work anymore or you think that you’ve made enough money, and you want to stop working. It’s entirely your choice and not forced upon you through some employment contract that, at 60 or 65, you will stop working. I think that those are the kinds of questions that we need to focus our attention on.

When is it that a person has access to this money? How is it that this person draws down that money? Would you have different rules for someone, let’s say, who’s been a construction worker and is not likely to live past 75? Would you give access to that person at 55 versus somebody who’s had a desk job or a healthy lifestyle and so is likely to live to 85, 90? How does your sense of access to that pot of money and drawdowns from that pot of money change based on who that person is?

These are very important questions for us to answer because we have such a wide and diverse informal sector labor force. I assume that life expectancy experience for these large groups of people is going to be so different that we’ve got to think about it differently from how many OECD countries have thought about it.

RAJAGOPALAN: It’s not one size fits all to start with. Here, I feel like we could get creative without rocking the boat too much. For instance, the biggest issue we have with pensions and drawing down the amounts is you don’t want people to do it in a hot period. You want people to think about the question carefully. No one should just be able to withdraw all the money and get scammed, or their children withdraw all the money, or something untoward like that, or they do it in an emergency without realizing their options.

You could very easily have cooling periods. If you make a withdrawal before you’re 65, you can make a tiny withdrawal at any age you want, but you have to wait one year before you put in the request to make a bigger withdrawal. Most people who have a pension scheme, I think, can manage cashflow for a year. It won’t be easy. It’ll be tough. It might be usurious. It might be family and friends and so on, but a one-year cooling period to withdraw money at 50 doesn’t seem outrageous to me. 

Now, instead of saying we’re going to have different rules for different people, you could just say we have one rule, which is there’s a longish cooling period of one year if you do it at 50, there’s a six-month cooling period at 60, and so on, and then go from there. Most people will figure it out.

SANE: It sounds like a good idea, but again, how would you decide 50 and 60? On what basis are we even arriving at that age? I feel a little unsure about how to pick that particular age. 

RAJAGOPALAN: Don’t we have good actuarial tables for this? We have pretty decent actuarial studies on how long people are going to live and rough life expectancy in different states or different regions. This is quite precise calculation.

SANE: This can be precise calculations, but I’m not sure that we have good life tables for the full population. I think that the life insurance industry does have good tables for the segment of the population that they cover, but I’m not sure that that extends to the whole of the country. In fact, this becomes like a public good where you are able to put out this data. 

RAJAGOPALAN: You create the data set, yes.

SANE: You create the data set around life expectancy and mortality.

RAJAGOPALAN: We don’t even calculate births and deaths properly. What are you saying?

SANE: Exactly.

RAJAGOPALAN: Thathas to happen at the local level. Local municipalities and gram panchayats have now correctly started recording births and deaths.

SANE: Exactly. Now you begin to see the scale of the problem on how you could arrive at it. Though again, in the absence of this data, you will just have to pick some thumb rules and say 50 or 60 or whatever it is. We will have to have different access age, I think, for different sets of people. How you arrive at that is, again, a question for people to think about more carefully.

Regulatory Orders

RAJAGOPALAN: Yes. Do you mind if we switch over a little bit away from pensions? I want to talk about some of the other stuff that you’ve done. You work on so many different things, a lot of regulatory issues in the financial sector. I encourage everyone to go look up your website and read all your papers. The one thing that you do, which is quite unique that hardly anyone else has worked on is regulatory orders.

Here, India in the post-liberalization world—this is really in the last 25, 30-odd years, once we moved away from the command-and-control system—we had basically greater reliance on markets. Once you have greater reliance on markets, there’s greater reliance on regulators. A bunch of these regulatory agencies and statutory agencies were created. They were given all kinds of powers. This could be SEBI. It could be the telecom regulator. It could be the bankruptcy regulator. It could be all different versions of the kinds of regulators you need in a functioning market economy.

India has, like many other parts of the world, this problem of regulators becoming sui generis and all powerful. They are Brahma, Vishnu, Mahesh all combined. They are legislature, executive, judiciary all rolled into one. Their orders, sometimes we don’t know if they are making law, if they’re enforcing law, or if they’re interpreting law, or they’re executing. This becomes a really complicated thing.

There are two parts to this. One is, how do we even think of these orders? Then the second part of it is, how should we write these orders? You’ve actually done a fair bit of work on both of these. Before we get into the orders for the super geeky law and econ fan listeners, can you tell us a little bit more about the regulators and how the system operates, before we talk about the importance of the orders and what you’re doing with it?

SANE: Sure. As you mentioned, regulators are like mini states, that they fuse all kinds of powers in one agency. SEBI, for example, writes law, it makes regulations, it has executive functions, it does inspections of brokers, for example, and then it passes orders against regulated entities. If I am accused of insider trading, then SEBI will first write the regulations on what constitutes insider trading, then SEBI will conduct an investigation on me, and then the SEBI adjudicating officer or whole-time member will write an order against me. I can, of course, defend myself, but ultimately, it is still the same SEBI, if not the same person within SEBI, that is writing these orders.

RAJAGOPALAN: There’s only one option, which is an appellate authority which is supposed to be different from SEBI, but we’re not sure how different it is?

SANE: No, the Securities Appellate Tribunal, I would think, is separate from SEBI, though it has had problems in terms of staffing more recently. I do think that the appellate tribunal, you can go to the appellate tribunal and hope to get a fair hearing there. Of course, let me not open the question of the design of tribunals and the issues around this concept of a tribunal.

RAJAGOPALAN: You have to come back and do a whole other episode for that.

SANE: Yes. Maybe one day we will discuss tribunals, but I don’t want to raise that question here at all. We’ll just stick to the regulators in this episode. Yes, the regulator is doing all of these things at one time. Then that makes you ask the question, how is it that the regulator is performing on all of these functions? This has an inordinate amount of influence on how markets work because a large number of markets today are actually under these statutory regulatory authorities and all of these decisions are made by these SRAs.

It becomes important to ask a bunch of questions around how they are performing each of these functions. Is the regulator itself following the rule of law? Is it following the things written in its statute in how it must do adjudication? Those are the questions that we began to ask at TrustBridge: Can we evaluate the regulator’s performance on its adjudicatory function because we get access to all of these orders? We know what the SEBI Act says that SEBI should do, let’s say, when it comes to imposing penalties. Is SEBI doing that? That’s the kind of work that we started to do. 

RAJAGOPALAN: Is this sort of a do-we-follow-our-own-rules question? Is it that core-level rule of law project?

SANE: Yes. Do we follow our own rules? This is important because if we don’t, then there is uncertainty and unpredictability in the market. You do want that the regulator follows the rule of law when doing its adjudication function, when doing any of its function for that matter. We started with that. We made a list of benchmarks that we think SEBI should follow based on its own act, based on certain basic principles of natural justice.

Then we analyzed all SEBI orders on insider trading and saw whether they did this, or they don’t do this. We find that there are many gaps in the way SEBI writes its order. Many things are missing. One important thing that is missing is the SEBI Act says that if I have to impose a penalty on you, the amount of penalty must be based on factor A, B, C. What is the unfair gain that you have made?

Then the penalty has to be proportionate to the amount of money that I have made illegally. What we find is that many orders do not have this amount. They say we are not able to calculate this number, and so we are going to put some minimum penalty on you. Similarly, when SEBI goes ahead and passes orders on debarment from capital markets.

RAJAGOPALAN: Oh, yes.

SANE: I say, now I’m just debarring you from doing business. The question is, but on what grounds and what is the rationale that you are giving for imposing such a sanction on me?

RAJAGOPALAN: Also for how long and what is proportionate, right?

SANE: Exactly. We find that there are many gaps in the way SEBI is conducting this function. We need to now figure out how to fix it. We have then gone ahead and done some work around what makes a complete order. How do you know what is a complete order? We have, from theory, come up with some benchmarks around completeness of an order. Now we are working on a tool where you put in any order, and then it will tell you that on these aspects, the order is not complete.

These benchmarks are a combination of benchmarks that are common to everyone, like the date of show-cause notice should be written in the order. There are these basics that you’ve just got to get right, and they should be part of any order, whether it’s a CCI order or a SEBI order or a electricity regulatory order, it doesn’t matter. Then there are benchmarks that are specific to the question at hand.

If you’re doing SEBI insider trading, there are certain things that should be there, like being able to establish whether you are an insider or not. That’s where we need to start before we can move ahead. Similarly, whether it’s electricity or competition or whatever, you will have different benchmarks based on what is the specific regulator and what is the specific violation that you are looking at.

We are in the process of building these benchmarks and a tool where you can just put in an order, and it’ll tell you everywhere that the order is missing. The hope is that we can deploy these for regulators and in the public domain, and so that everybody’s quality of information will improve as to the quality of the order. Once we know that the order is missing XYZ, we can then push for change in how some of these regulatory orders are written. I’d also like to mention that while we keep complaining about SEBI and any other regulator, the king of all these regulators, the RBI, doesn’t even put out—

RAJAGOPALAN: RBI.

SANE: —these orders in the public domain.

RAJAGOPALAN: Crazy.

SANE: We can’t even study what the RBI is doing. I think that is problematic, and we need to write about it a lot more and talk about it a lot more because all we get from them are press releases. I don’t know how to do the work when I don’t have the data, but that is certainly an issue that we need to push for and get a little bit more transparency around the orders that the Reserve Bank of India is putting out or not putting out at the moment.

RAJAGOPALAN: Though there’s been a nice movement. Recently, I saw that they have pulled together 600 master circulars and—

SANE: That’s right. 

RAJAGOPALAN: —pulled it together in one rule book or something. I was like, “Okay, death by 1,000 cuts is now maybe death by one book or something.” Honestly, it’s an improvement. I’ll take it at this point. I want to go back to this as a rule of law project and just sit with it for a minute because I think what you’re doing is important, but not just in the context of financial markets or like CCI or SEBI or whatever, your insurance regulator, your electricity regulator.

What we’ve missed out in India jurisprudence is rule of law from a procedural point of view. In India, rule of law is only substantive rights. How many more human rights can we tag onto everything? Right to live with dignity in old age is the way the rule of law for pensions is written into our constitutional jurisprudence, but it’s not written in saying this is how your pension regulator should work and this is how your insurance regulator should work and so on.

This procedural rule of law, which is actually the only way I think of rule of law, and the long-term jurisprudence on rule of law comes through, is this granular work of how are we writing orders? Did we get the dates right? Did we give show-cause notice? Did we give them a right to refute whatever the Brahma, Vishnu, Mahesh concocted and imposed on them? Is there an appellate tribunal? So many little tiny details are what we really need.

The way you’ve managed to get to it is, when we were a command-and-control economy, it didn’t matter quite as much. Now we’re a liberalized economy. It relies on markets. Markets require certainty, and markets require fairness and nonarbitrary rule-making or order-making. Otherwise, the entire system will just clamp down. All investment clamps down and so on. It’s an interesting way to think about the broader rule of law jurisprudence. Is that how you think about this, or am I reading too much into what you’re doing?

SANE: No, you’re spot on. I’m so glad that you got it right, which means that we are saying something on our website that probably makes sense.

RAJAGOPALAN: I actually haven’t read the website. I’ve only read the papers. I should probably read the website now.

SANE: All right. Yes, you’re absolutely thinking about it right, that until we get our regulators to function, much of the investment in the economy is going to not happen because many of these important sectors are now governed by statutory regulatory authorities, as I said earlier. How they write regulations, how they conduct the executive function, how they write adjudicatory orders is extremely important and determines how the economy will do in the long term and in the short term also, I suppose.

Yes, that’s how we are looking at it. The first place to start is really measurement. You have to first ask how is it that they are functioning to be able to know where is it that the problems are and how can we set them right. That’s the journey on which that we have begun. We are also doing work on the legislative side of things, which is to start saying, how is it that you design regulations.

In the case of insider trading, for example, it’s how do you define an insider? Who’s an insider? What is this unpublished price-sensitive information? When is it that you can say that insider trading is said to have happened? All of these things are extremely important because they also shape the way the regulator will write the orders, because if the law and the regulations are not clear, then you will have badly written orders.

Let’s take the example of fraud. Fraud is difficult, but if you do not draw the contours of where you will start thinking about fraud, then you can’t blame the adjudicatory authority for not having the guidance on how to think of a particular case of fraud. I think these things are quite related. We are trying to look at it from both sides, from the legislative side and the quasi-judicial side to see where is it that we can do better.

RAJAGOPALAN: There’s a third side, which we really struggle with in India, with more statutes, which is delegated legislation. We’re just making shit up. Sorry for terrible language, but I don’t even know how else to describe it. You have the statute, then you have the rules, the power to make rules. The rules are whatever they are. Then there are some sort of like a plethora of circulars and notifications, and this, that, and the other, which is just floating around all over the place. At some point, no one knows what the law actually is. This is a serious problem at the lawmaking level.

SANE: Absolutely.

RAJAGOPALAN: To me, it seems like the delegated legislation problem is not as bad in the regulatory systems you are talking about because of the same trinity problem. We’ve combined the quasi-legislative, quasi-executive, quasi-judicial functions, which means now because they’re rolled into one, you don’t have this crazy, delegated legislation, except we don’t know what is legislation and what is judicial and what is executive anymore.

At least it’s contained and you can track it in some sense. Unlike labor law, where I don’t know what the circulars say, or unlike land law, where I don’t know what the circle rates are because every week, some new circular is issued on what the circle rate is. Am I on the right track that this is less of a problem, or at least it’s a more contained problem, if not less of a problem?

SANE: Yes, I wouldn’t say it’s less of a problem, but it may certainly be contained in the sense that even these regulators do give out circulars and guidelines and FAQs all the time. 

RAJAGOPALAN: What is with the FAQs? Just tell us what the rule is. Okay, we’ll talk about FAQs in a minute. Sorry, please finish the thought.

SANE: No, I have nothing more to say other than the fact that while technically and theoretically these are not law, whether you are supposed to follow it or not is anybody’s guess. Then, as a regulated entity, it’s just safe for me to follow it because I don’t want to be hauled up, and I don’t want an adverse order against me, and I don’t want to fight that adverse order and spend time trying to fight that adverse order. I think that the plethora of instruments is a problem. 

There is another problem here, which is that regulations are supposed to be laid before parliament and therefore are supposed to get some scrutiny before they come into effect. Now, it’s another thing that parliament itself does not look at them. You have this problem where on the one hand, regulators are doing all of these kinds of things, but on the other hand, the parliament is also not doing what it is supposed to be doing in looking at these regulations and discussing and debating these regulations more carefully.

It’s a bit of a mess, and we have to find ways to go from here. Containing these instruments and at least having them in regulations is a way to start. Also, I think the better our appellate bodies get, the more regulated entities will find the courage to file cases against the regulator. Because how can you pass an order against me on the basis of something that’s said in an FAQ or something that’s said in the basis of a circular? Once you have courts starting to acknowledge and uphold these—

RAJAGOPALAN: Acknowledge.

SANE: —then I think that’s where the pressure for the regulator comes from, because, so far, courts are largely deferential towards regulators, and that’s true everywhere in the world because regulators are seen as these fountains of expertise.

RAJAGOPALAN: Subject matter experts, yes.

SANE: Exactly. I do think that this is changing because people are beginning to realize that there is a problem here and the more work that we are able to put out in the public domain, we hope that it gets used to make arguments such as these and then that finally ultimately gets used to improve the regulatory apparatus and the regulatory state capacity that we see in India.

Improving Transparency at the Reserve Bank of India

RAJAGOPALAN: Yes. I’m totally with you. Now, on the question of the plethora of instruments, I think RBI is some other level. This is my last question of the RBI for you. The RBI is an all-purpose bank. It has to manage monetary policy, rate setting, liquidity, inflation targeting, all of that. Another function the RBI has is managing the external sector, foreign exchange, capital flows, and so on. Then there is a third separate matter, which is what you deal with a little bit more directly, which is the supervision and regulation function of public sector banks. Then there’s also the supervision and regulation of private sector banks, which is a little bit different from public sector banks.

SANE: You have to add payments to it now.

RAJAGOPALAN: Yes. Then there is payments. Then there is also the task of guarding savings, managing deposit insurance. There is DICGC. There’s a whole bunch of other things. It’s the debt issuer to the government. It’s also placing government of India securities. It’s the issuer of currency, which now in hindsight might be the simplest thing that it does, notwithstanding demonetization. It has all these different functions, and we’ve obviously rolled it into one.

Now there are other countries which experiment with different models where they’ve separated all these different functions. Let’s not get into that. The core of what you are really thinking about is its role as a regulator of the rest of the banking industry, effectively. There is this licensing/de-licensing function. They have extraordinary powers with private sector banks. They can fire sitting CEOs of private sector banks. They can really interfere with the day-to-day running of a lot of things. What is a good way to think about RBI orders when it comes just to the regulatory and supervision function of public and private sector banks?

SANE: I think the first place to start is to have these orders in the public domain. I mean the adjudicatory orders. 

RAJAGOPALAN: Hang on a second. When you say they’re not in the public domain, you’re saying they just have a closed hearing, and nothing’s out.

SANE: That’s right. You only see a press release that HDFC Bank is fined X crores, or this NBFC—

RAJAGOPALAN: That’s bananas.

SANE: —or that NBFC is fined whatever. Amol Kulkarni and I have a piece on The Leap Blog on looking at some of these things. Then we also compare how other central banks deal with this.

RAJAGOPALAN: Not by press release. That much I can tell you.

SANE: Whatever the press release is, it’s a lot more informative and a lot more structured around the information that the regulator puts out. I think that the first place to start is actually a little bit more transparency around what is happening on these questions so that the larger public can get to know what has happened. 

RAJAGOPALAN: What is the reason they give for not putting the orders out in public? Is there a reason given? Can we RTI it?

SANE: I don’t know if you will get it through RTI. I think one reason that they give is because banking is sensitive. If there is a fine on a bank, there might be a run on a bank. 

RAJAGOPALAN: It’s in the press release.

SANE: Afterwards, much later.

RAJAGOPALAN: Yes, but what I’m saying is there’s a press release anyway, so a run could happen at any point, right?

SANE: Not when you have a trivial piece of information that you’ve just been fined so much, and not what you have actually done. I think that’s one of the reasons I’ve heard people give for RBI not putting out its orders in the public domain. I really think that this is a huge problem and that we’ve got to begin there because that’s when you know what is actually going on the adjudicatory side.

RAJAGOPALAN: Hang on. Sorry, I’m stuck on this for a second. I understand that the RBI doesn’t want court reporters and television streaming on whatever their adjudication is, but ex post, what’s the difference between a press release and the order? It’s the same thing.

SANE: Yes, but the press release doesn’t give a lot more information.

RAJAGOPALAN: If you give me the press release, you might as well give the order is my point, right?

SANE: Because in the order, you’ll have to give your reasoning, and you’ll have to talk in detail about what actually happened. What is it that you are fining a particular bank for? You may have to put out what was the bank’s defense on that, like SEBI orders do. SEBI orders tell you the whole story, and they are pretty detailed. You do get that information out there. 

RAJAGOPALAN: No, I understand. No, no, I just want to belabor this for a second because the way I think about regulators everywhere is regulation is not cheap. Supervisory function and regulation is not cheap. In an ideal world, the regulator needs to step in when the market can’t regulate. In financial markets, we routinely talk about how there’s massive amounts of asymmetric information and so on. The markets can’t function in this frictionless way, so we need this regulator to come in. 

Now, given that this is the nature of the market, why are you making the information more asymmetric? You should make it less asymmetric so that the market can actually regulate and supervise on its own at a lower cost to the regulator. Am I getting this backwards? Sorry.

SANE: No, Shruti, this is your next blog, when we should start writing about this a little bit more so we have people like you as well contributing to the debate specifically on this question.

RAJAGOPALAN: This is nuts. Shouldn’t you put the order out so that the customers or whichever bank that they are passing the order against are more aware of what’s happening with that bank and can vote with their feet and vote with their bank? Isn’t that exactly what you would want as a regulator?

SANE: I would think so.

RAJAGOPALAN: We’re on the same page. I’m not crazy. No, sometimes when I read this stuff, and I get the ostensible reason, and I know you’re telling me that it’s the ostensible reason, it’s not your reason, I’m like, “Hang on a second, this ostensible reason makes no sense to me.” It’s like asymmetric information is the problem, so we’ll create more asymmetric information by not making the order public. I’m just shaming them at this point.

SANE: That’s how we do consumer protection. We’re protecting you from the bad news.

RAJAGOPALAN: The thing with all the regulators is everyone wants sunlight and transparency in every other market other than the one they regulate. Because their things are really special, right?

SANE: That’s right. I think all the other regulators are much better.

RAJAGOPALAN: Much better, yes.

SANE: At least you see what they have done on the orders. With the RBI, you don’t get to see. Electricity regulators, for example, all of their orders are in the public domain, and you can study them. They go to APTEL, and then you hear what the APTEL is saying, and then they go to supreme court, and with a great deal of difficulty, you can map that entire life cycle as we are doing.

RAJAGOPALAN: I saw Chitrakshi’s piece on this. It’s crazy.

SANE: That’s right. The whole mapping from SEBI to appellate tribunal to supreme court, whether it’s in securities markets or in electricity or any other market, it’s difficult to do because this is not easily available, but you can do it, and then it sheds a lot of light on what regulators are doing and thinking. With the RBI, it becomes difficult.

RAJAGOPALAN: How much of an appetite is there for stuff like this? I imagine lawyers love this. Because whoever their client is, more certainty is better. Even if they are on the penalty side, it’s just better to get it done quickly and to have more certainty, reliability, and so on. Who’s pushing against this? My imagination is the regulators should want this. Lawyers should want this. People who are in the market as market participants should want this. Is there really a group that is fighting against better orders, or is it just a capacity-building issue?

SANE: I think it’s a bit of both because the more transparency that you require of a regulator, the more difficult it is for them. For example, on a specific issue, both of us are adjudicating officers and you rule one way, and I rule another way. Now, the minute I start saying that there is a certain boundary and then you have to look at the previous order and then justify if Shruti has already taken a certain decision and there is some jurisprudence that has built up, why are you changing your mind about similar set of facts? Then that’s imposing a lot more work and a lot more constraints on how I think. I think there’s that problem. The second is then it’s a capacity issue.

RAJAGOPALAN: The capacity issue, I understand. Our regulators are new. It takes a century to build capacity, state capacity, especially. We’ve just been doing this for 10, 15, 20 years with slapdash statutes, and we’re building the airplane as we fly it. Our markets are also developing as we do this. We didn’t liberalize overnight. We liberalized gradually in tiny stages. I imagine some of this will get caught up. The second part of what you’re saying is what I find more disturbing, which is what you’re saying is they don’t want their hands tied. Sorry.

SANE: That is true of everybody. That is true of every state. This is a hard-won battle in every country in the world. I guess that it’s not new, if you look at the arc of humanity and the arc of any state. That’s what we’ve also got to do. As we are seeing in the world today, that you have to constantly fight for things that are obvious to citizens and regulated entities. It’s a constant battle. I think that’s what we are in.

We also hope that we’re able to take this to the regulator and actually improve their capacity. We want to fight this problem at both ends. We want to fight it at the intention and incentives end because what’s in it for the person sitting in that chair to do that job better? Even if the person wanted to, then where is the capacity for it? How do you help make that happen?

On the one hand, you have to augment state capacity. On the other hand, you also have to set the right incentives through the way the regulator is structured or through the way the law is written so that it incentivizes good behavior of this kind. I think the battle has to be fought on both fronts.

RAJAGOPALAN: That’s both reassuring and worrying, how much work is left to be done. Thank you so much for doing this, Renuka. This was an absolute pleasure.

SANE: Thank you very much for having me, Shruti.