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