Big­gest Eco­nomic Re­form

The big­gest re­form In­dia needs is to clean up po­lit­i­cal fund­ing; elec­toral bonds don’t cut it

The Economic Times - - The Edit Page - T K Arun

In the wake of the Union Bud­get, de­bates sprout on if the Bud­get did enough to stim­u­late growth. Such de­bates re­in­force the no­tion that Bud­gets boost growth. Mis­tak­enly.

What hob­bles In­dia’s growth is bad pol­i­tics. Pol­i­tics has to re­form, if the econ­omy is to gal­lop ahead. And po­lit­i­cal re­form is some­thing that goes be­yond Bud­gets.

Take the power sec­tor. About 30% of the power that is gen­er­ated is not paid for, and nearly half the in­stalled gen­er­a­tion ca­pac­ity re­mains idle.

That crip­ples the sec­tor, makes in­vest­ment made in power gen­er­a­tion a mill around the necks of the brave souls who ven­tured into power, many of whom are qui­etly drown­ing in the debt they took on to fi­nance their ex­pen­sive projects.

Pol­i­tics Hob­bles Growth

Why is 30% of the gen­er­ated power not paid for? About 10-11% of the power is lost dur­ing trans­mis­sion and dis­tri­bu­tion (T&D). These tech­ni­cal losses can be brought down fur­ther, but only by in­cur­ring huge in­vest­ment that is re­ally not jus­ti­fied. The sys­tem can live with that level of T&D losses. But not with theft of about a fifth of the power that is gen­er­ated.

Is the power given away for free to a farmer theft? If a state gov­ern­ment wants to sub­sidise farm­ers, it must make good the un­re­alised cost of power to the util­ity that sup­plies it.

If it fails to, it is plain theft, on par with the theft of power by a smallscale unit that draws a line from an un­metered farm con­nec­tion to run its op­er­a­tions.

Pol­i­tics deems it is le­git­i­mate func­tion to pa­tro­n­ise power theft. Hik­ing tar­iffs to re­cover the en­tire cost from those who do pay is un­fair, and, in any case, is seen to be anti-peo­ple. So, util­i­ties run up losses, and can­not pay for power pur­chases. So, they end up lim­it­ing sup­ply. In­stalled ca­pac­ity re­mains idle, even when peo­ple des­per­ately seek power and run ex­pen­sive, dirty diesel gen­er­a­tors to meet un­avoid­able needs.

Get­ting peo­ple to pay for the power they con­sume calls for a change in po­lit­i­cal cul­ture, not bud­getary mea­sures. Who is at­tempt­ing that?

Clean­ing up po­lit­i­cal fund­ing is the ba­sic eco­nomic re­form In­dia needs. Po­lit­i­cal fund­ing is mostly opaque and fi­nanced by the pro­ceeds of cor­rup­tion. One way in­dus­tri­al­ists mo­bilise the money they need to fund politi­cians (no one in his right mind gives se­ri­ous money to a party — you fund in­di­vid­ual politi­cians who can be called upon to de­liver es­sen­tial ser­vices when re­quired) is to in­flate project costs.

Banks fi­nance in­flated projects, al­low­ing pro­mot­ers to take money out of the project dur­ing im­ple­men­ta­tion. This has two con­se­quences. Banks have too much debt on dis­pro­por­tion­ately small pro­duc­tion ca­pac­ity. The in­dus­tri­al­ist has high­erthan-war­ranted cap­i­tal costs and that makes his out­put more ex­pen­sive than it ought to be.

If that out­put is power or steel or a con­structed road, cost in­fla­tion of the project will in­fect all pro­duc­tion costs down the line. In­dian man­u­fac­tur­ers will cry they can­not com­pete with China — or In­done­sia or Viet­nam or even Bangladesh. Hav­ing made a stash while set­ting up the project, they have lit­tle in­cen­tive to run it ef­fi­ciently, to be­gin with.

Poll Bonds Spell Opac­ity

An­other form of po­lit­i­cal fund­ing is dis­ap­pear­ing, thanks to Aad­haar-led re­form of sub­sidy ad­min­is­tra­tion. Di­rect trans­fer of ben­e­fits to bank ac­counts re­moves mid­dle­men and cor­rup­tion. Lower-level po­lit­i­cal func­tionar­ies stand de­prived of a chance to fund them­selves — well, not com­pletely. Po­lit­i­cal fac­to­tum still iden­tify a lot of ben­e­fi­cia­ries, and can de­mand a cut of the ben­e­fits in re­turn. But their take is be­ing steadily whit­tled down.

This makes them more re­liant on tak­ing a cut of lo­cal-level projects funded by the gov­ern­ment, ei­ther by in­flat­ing project costs or through shoddy ex­e­cu­tion. Or it makes them more re­liant on hand­outs from cen­tralised party cof­fers.

Party lead­ers, thus, cen­tralise the fund­ing of the or­gan­i­sa­tion. Cor­rup­tion ceases to be re­tail and be­comes more or­gan­ised, so­phis­ti­cated and less vis­i­ble to the pub­lic at large.

Doesn’t Bud­get 2017 do its bit to clean up po­lit­i­cal fund­ing, with the pro­posal for elec­toral bonds? This is trav­esty of po­lit­i­cal fund­ing re­form. It re­places trans­parency with opac­ity as the norm in po­lit­i­cal fund­ing — the only pur­pose of an elec­toral bond is to mask the iden­tity of a donor who uses the bond to make his po­lit­i­cal con­tri­bu­tion. In a democ­racy, peo­ple need to know who funds parties and politi­cians and to what end.

Fur­ther, clean­ing up the fi­nanc­ing of a tiny frac­tion of the ac­tual ex­pen­di­ture parties own up to is nei­ther here nor there. The Bud­get has no pro­posal to get a han­dle on ac­tual po­lit­i­cal ex­pen­di­ture.

The re­form the coun­try needs is to man­date all parties to dis­close all ex­pen­di­ture at ev­ery level from the polling booth and the pan­chayat to the state and the na­tion, open this claim to chal­lenge by ri­val parties and in­de­pen­dent ob­servers, fi­nalise a fig­ure from this con­tes­ta­tion and have parties show the source to fi­nance this ex­pen­di­ture.

That is po­lit­i­cal re­form, not a Bud­get mea­sure.

Sirji, they ap­par­ently want an in­voice

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