What’s the secret of BJP and Modi’s success? Electoral Bonds, you bet

Political bribes by corporate bodies and contractors continue to flourish, more than ever. But it is now ‘legal’ because the Government has made it so.

Electoral Bonds, a smarter, more efficient and more sophisticated instrument of bribe giving, have empowered the Union Government to override the states and have brought back a more arbitrary and opaque form of the license-permit Raj through the backdoor.

Patronage is no longer in the public eye and there is no audit trail. Business and tech companies can now anonymously bribe the ruling party, strike deals directly and in private. Open bids and competition are things of the past.

In New India, Sarkar Ki Tandaroosti Ka Raaj lie in Electoral Bonds.

Read on:

Anonymous Electoral Bonds constitute a structural form of “corruption”, rightly noted India’s best known public intellectual Pratap Bhanu Mehta. But the Bonds are also a far more “efficient” form of corruption than the system in vogue earlier.

The Bonds restrict rent dissipation, help both the receiver of the bribe (rent) as well as the giver, and ensure a higher return to both.

They have also been instrumental in creating an unprecedented concentration of power at the top of the ruling party hierarchy.

But do they help in building a healthy polity free of corruption? Not quite.

Rent creation & dissipation

Gary Becker, a Nobel Laureate in Economics, had looked at the idea of corruption from the point of view of the bribe seeker, rather than the bribe giver.

He argued that it is the bribe-seeker who has the power to create an opportunity for rent as also to control access to that opportunity. The bribe giver's power is limited to having the money to meet the demand.

According to Becker, it is those in the Government who create opportunities for rent seeking, in order to extract a rent for themselves.

To understand the model:

If the market price of an asset available from the Government is “P” and the price at which it is offered to bidders is “A” or ASKING PRICE, which is lower than P, the opportunity for rent created is “P – A”. The “Rent” will then be shared by people who created the opportunity for rent in the first place, people in the Government in this case, and the successful bidder.

Becker pointed out that if everybody is allowed to bid competitively for the same asset, the bid price will approximate the market price P, in which case the Rent [P - A] will dissipate and both creator of the opportunity and the bidder will be left with little, less or next to nothing.

So, it is in the interest of both to restrict competitive bidding. Non-price barriers to entry are raised, bids are manipulated through secret understanding that price of a service supplied by a bidder will be allowed to be raised subsequently, even if it is expressly forbidden in the bid document [think of power tariffs].

By restricting competitive bidding through these means, the value of Rent is preserved, and this value is then shared by those who created the opportunity and those who bid for the asset or provide a service.

The yield from corruption to both increases from what was possible in the earlier free-for-all, no barriers to entry system

(Legacy System) that prevailed.

How did the Legacy system work?

The legacy system, that evolved after Independence, was rooted in the license-permit raj, where state clearances were available via patronage, in exchange for donations.

The model was the traditional, small chai-pani model scaled up, wherein you pay some backsheesh under the table in order to jump the queue. The jumping of the queue benefits the bidder, and he is happy to part with some of his rent for the favour.

The problem with the model is price discovery. For the model to work, you must have a declared price that will enable a person to jump the queue or have preferred access. Anybody who pays the price is welcomed. So, everybody freely bids for the asset or the service.

This led to a kind of public auction, where P, the market price, comes close to “A” price and the rent, the difference between the two diminishes or disappears. This is what Becker called rent dissipation.

But since the successful bidder must still pay for access, the bribe paid becomes a tax, or part of the cost of doing business. In the process, the bidder loses out on rent, haggles over the price or worse, compromises on quality.

The last reason accounts for the shoddy execution of contracts under the old legacy model. And most of the craters on our roads during monsoons bear testimony.

Earlier governments followed this inefficient and antiquated model, where price had to be public and therefore the corrupt practices used were very much in the public domain.

Officials lower-down were thus emboldened to create their own opportunities for rent seeking, using a plethora of rules and regulations. Corruption became rampant, very visible, and very public.

Collection of rents, in the pre-reform era, was centralized at the very top of the hierarchy. And since the Union Government controlled access to licenses and permits tightly, firms were obliged to deal with it. The states were virtually powerless, and most CMs were "appointed" by New Delhi and were often rootless wonders. Thus, the party in power at the Centre, in the pre-reform era, was all-powerful, and every satrap at the state level served at its pleasure.

The 90/91 reforms changed the system

The 90-91 economic reforms reconfigured the economics of power even more than the economy itself.

Whether the change was intentional or merely unanticipated, one does not know. But the net effect of dismantling the license permit raj was that firms no longer had to rush to Delhi for industrial or import licenses or lobby frequently for tweaks in excise or customs duty. For a while, even borrowings from banks were largely on merit, though old habits returned before long.

With no need to curry favour from New Delhi, firms ceased to pay obeisance to ‘powers’ in Delhi. The Centre lost its monopoly on power, and with it its control over funding and finance.

Action instead shifted to the states, which controlled land, utilities, environmental permissions and labour regulations, and thus were able to extract rent on their own. CMs got real power, money now began to flow from states to the Centre, and the party in power at the Centre no longer remained either ‘High’ or in “Command”.

The chief ministers continued to contribute to the central kitty, albeit at reduced levels, and often after driving hard bargains. With no resources of its own at the Centre, it was only a matter of time before the party HQ in power at the Centre began to lose clout.

Ironically, the party High Command lost power because they became less adept at extracting rent, not more. I believe later historians and economists will be able to discern the decline of the Congress to this shift in power.

Enter Anonymous Electoral Bonds

Electoral Bonds have profoundly altered politics after the liberalization of 90/91, though not all the changes were possibly intended by the BJP and the RSS.

First & foremost among the changes is sharp ‘Recentralization’ of power and its concentration once again at the apex.

This was done by explicitly restricting interface with tycoons and the party at the very top. All policy tweaking needed by tycoons to ring-fence domestic markets through an overvalued INR and/or customs duties on imports etc. is done from the Centre. Collection of donations of Electoral Bonds naturally became the party's treasury function and power flowed back to the Centre, making Modi and BJP strong.

This was followed by going back to the old model of "appointing" CMs from the Centre. These leaders were now deliberately and carefully chosen so that they did not command a clear power base of their own, using an elaborate caste/community calculus.

A combination of such “appointed” CMs, with liberal use of "agencies" to watch over them so that they did not raise their own resources like CMs earlier did, combined with central control on deployment of AEB money, gave the Centre full control over party and power in the states, and the unique ability to squelch any dissent.

That is why editor-uncles and aunties in the media called the new BJP Government “strong", meaning it was immune to challenges from within or without [despite any number of catastrophic policy blunders] but they were too tongue-tied to articulate the reasons for it.

With funding for the ruling party centralised at the top in the Govt., the leadership could claim to be great corruption fighters, since Anonymous Electoral Bonds were made legal and the quid pro quo was safely behind the scenes with no clear audit trails.

In order to deter rivals within the power-structure including within the RSS/BJP, you could then turn on anybody being corrupt, in order to preserve your own monopoly over funding. So, you could be a champion corruption fighter while business continued unhindered as before.

It is indeed the best of all worlds for those in power at the Centre.

Since the Gary Becker model requires you to restrict access to rent seeking, except to a select few, the price of such opportunities is not in the public domain and those outside the charmed circle have little clue on how to access such opportunities.

This means that such rent seeking becomes a quiet, private affair, outside the public domain, unlike in pre-2014 days or before 2017 when the Bonds were surreptitiously introduced in the Budget, despite reservations voiced by the Reserve Bank of India.

What is more, yields from rents are now far greater than what they were under the earlier free-for-all system and the “take” of the rent creator and the rent giver is that much higher.

What could be better for the party in power?

No wonder, therefore, that BJP is the richest political party in our history and the market price of MLAs is higher than blue-chip PE multiples.

Old wine in a new bottle.

(The writer is an independent trader. Views are personal)