Have Anonymous Electoral Bonds eliminated Corruption?

Or merely hidden it from the public sphere.

Structural
“Corruption”:

Anonymous Electoral Bonds [AEBs] are no doubt a structural form of “corruption”, as noted by India’s best public intellectual, P B Mehta.  But they are a far more “efficient” form of corruption, than the legacy system in vogue during the Congress regime.  AEBs restrict rent dissipation, which helps both the receiver of a rent, as well as the giver, with a higher return than available from the legacy system.  As such, it is a vast improvement in efficacy per se.  

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?  We will explore that in this essay.

Gary Becker's idea of
rent creation & rent
dissipation  

GaryBecker, a Nobel Laureate in economics, turns the whole idea of corruption upside down, and looks at it from the point of view of the bribe seeker, rather than the bribe giver, arguing rightly that, it is bribe-seeker who has the power to create an opportunity for rent, and also to control access to that opportunity.  The bribe giver's power is limited to having the money to meet the demand.

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

To understand the model:

Let the market Price of an asset available from Govt. be P.  Let the price of the asset at which it is offered to bidders be “Ask”, which is lower than P.  Hence the opportunity for rent created is (P - Ask). 

The “Rent = P - Ask” will be shared by the people who created the opportunity for rent [Govt.], and the successful bidder.

Garry Becker says, if everybody is allowed to bid competitively for the asset, the bid price will approach P, the market price, and the Rent, [P - Ask] will dissipate, and both creator of the opportunity, and the bidder will be left with nothing.

So it is in the interest of both, to restrict competitive bidding, by creating non-price barriers to entry, or manipulating bids, or through having secret understanding that price of a service supplied by a bidder will be raised subsequently, even though it is expressly forbidden in the bid document [think power tariffs.]

By restricting competitive bidding through these means, the value of Rent is preserved, and this value is shared by those who create 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 a free-for-all, no barriers to entry, legacy system.

What was the legacy
system, and how did
it work?

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

The Congress model was the traditional small chai-pani model, scaled up, wherein you pay some backsheesh, off the record, 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 favor.

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 to provide a service, depending on the rent available, and the amount the bidder is willing to offer.

This leads to public auction kind of process, where P, the market price, becomes more or less the “ask” price, and the rent, the difference between the two, disappears.  This is what Becker calls 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, or haggles over the price, or worse, short-changes on quality.  The last reason accounts for the shoddy execution of contracts under the old legacy model.

The Congress followed this inefficient and antiquated model, where price had to be public, and therefore, the corrupt practices used were, more or less, 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, and corruption became rampant, and very visible and public.

Collection of rents, in the pre-reform era was centralized at the very top of the party hierarchy.  And since the Union Govt. controlled access to licenses and permits tightly, firms were obliged to deal with it only.  

The States were virtually powerless, and most CMs were "appointed" by the Center, and were often rootless wonders. Thus the Congress High Command, in the pre-reform era, was all-powerful in the party, and every satrap at the state level served at its pleasure.

90/91 reforms profoundly
changed the system:

The 90-91 economic reforms reconfigured the economics of power 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 merits, though old habits returned before long.

With no need to curry favor at the Center, firms ceased to pay obeisance to power in Delhi.  The Center lost its monopoly on power, and with it, its control over party finance.  

Action instead shifted to the States, who still controlled land, utilities, environment permissions, and labor regulation, and thus were able to extract rents on their own.  CMs got real power, money now flowed from state to center, and the Congress High Command was neither High, nor in command.  Indeed many a regional chieftain simply walked out of the Congress when challenged, and formed their own regional setups.  

The effect on the power of the Gandhi family was profound but little understood by them.  The Congress CMs continued to contribute to the central kitty, albeit at reduced levels, and often driving hard bargains, but with no owned resources, it was only a matter of time before the family began to visibly lose clout.  Irony is, they lost power, because they became less adept at extracting rent, not more.  The family no longer had the power to nominate CMs to economically important states.

The Gandhi family, plowed on trading on the family brand name, along with some precarious balancing of power among regional chieftains, but it was clear, that its glory days were over.

Historians I think will trace the demise of the Gandhi family chokehold on power back to the 90/91 reforms, and its inability to comprehend the very complex patronage system it had created. Nor did it have the wisdom to replace the old system with something more appropriate.  The lack of skills for statecraft was never so telling.

The loss of states to ambitious local leaders has further undermined the Gandhi family, leaving it with only a brand name.  Power had shifted to state level leaders.

Enter Anonymous Electoral
Bonds:

Not all the changes that AEBs have triggered were intended. 
Nevertheless, they have profoundly altered politics after the liberalization of 90/91. 

First & foremost among the changes, is sharp recentralization of power, and its concentration 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, were done from the center.  Collection of donations via AEBs naturally became the party's treasury function, and power went back to the Center.

This was followed by the adopting old Congress model of "appointing" CMs at the state level, from the center.  These leaders were deliberately and carefully chosen so that they did not command a clear power base of their own, using an elaborate cast/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 Congress CMs of old, combined with Central control on deployment of AEB money, gives the center full control over party, and power at the states, and an unique ability to squelch any dissent.  

That is why editor-uncles called the new BJP Govt. ”strong", meaning immune to challenge from with-in or with-out, [despite any number of catastrophic policy blunders], but were too tongue-tied to articulate the reasons for it.

With funding for the party, centralized at the top in Govt., the leadership could claim to be great corruption fighters, since AEBs were legal, and the quid pro quo was safely behind the scenes, with no audit trails possible.

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

Since the Gary Becker model actually requires you to restrict access to rent seeking except to a very 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 as it was under the Congress rule.

Not the least, the yields from rents are far greater than they would be under the free-for-all Congress system, and the “take” of the rent creator and the rent seeker is that much higher.  What could be better for the party?  No wonder therefore, that BJP is the richest political party in our history, and the market valuation of MLAs is higher than those of blue-chips, in terms of PE multiples.

Sulking tycoons, falling
investment, slower
growth:

While the AEB is an unqualified success, from the POV of rent creators, and rent seekers, and those who wish to centralize and concentrate power as closely as possible, the system has its drawbacks.

Firstly, the rent creating opportunity, through an over-valued INR combined with import duties, to create ring-fenced markets with sheltered profits for favored tycoons, is sub-optimal. The system encourages inefficient monopolies at home, at the cost of efficient exporters, tanking exports and turning attention away from global opportunities, to rent-seeking at home. 

Secondly, firms and tycoons excluded from competing for rents by high and concealed entry barriers, respond by investing less at home, repaying debts rather than making new investments, and eventually, by shifting business assets abroad to the extent possible.

The debilitating effect of the new model is clear in the manner in which merchandise exports have tanked, showing zero growth, and the sharp fall in Gross Capital Formation since 2014-15.  Clearly, the economy is slowing.

As the AEB model of political funding, an over-valued INR, rising import duties, gets baked in, exports will tank even further.  

With stagnating Gross domestic savings at 30%, and an ICOR of 5, the economy cannot grow at more than 5 to 6% at best; even assuming peak efficiency.  To grow at say 10%, all the extra needed growth must come from exports, which cannot happen because the rent creation for friendly monopolies requires an over-valued INR, and high import duties for turf protection. 

The two together also mean India cannot join regional and global trade pacts, which further restricts our exports.  We are being slowly driven out of international arena, to its margins, like tramps.

All told, while the AEBs are a huge success, being far more "efficient" in creating and protecting rent, and power, they are terribly bad for the economy, and society, pushing it inexorably into a lower growth orbit, and debilitating authoritarianism.  

They are bad for democracy as well because they concentrate power at the top, when a diverse polity needs to  push political power down to small towns and  municipalities in order liberate their growth potential, driven by local needs and aspirations.  The unintended consequences of AEBs could be dire in times to come.

What about the Gandhi family?  AEBs have given it a new lease of political life because collection of party funds has again become a central treasury function, providing some funds with which to keep the center in business.  Hence the intense tussle for the President’s post in the Congress. He who controls the treasury, controls the party.  

It is also a lesson in Statecraft that the RSS will have to learn the hard way.

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