Two reforms the new government should undertake

Political funding reform and creation of a vibrant debt market are vital for a better India

https://economictimes.indiatimes.com/opinion/et-commentary/games-bond-electoral-bond-two-reforms-that-indias-new-government-should-undertake/articleshow/110918333.cms

New GoI, clean up political funding, and create a functional market for corporate debt

T K Arun

Here are two reforms the new government should undertake: clean up political funding, and create a functional market for corporate debt. The two might seem disparate, but they are partners in a symbiotic relationship, the one enabling the other, like bees and flowers.

There is corruption in most countries. But most of that corruption is opportunistic. Those countries would do just fine, minus the corruption. In India, corruption is systemic. Corruption finances Indian politics. In the absence of corruption, Indian politics would grind to a halt. How so?

In large parts of the country, adult franchise arrived without much effort on the part of the populace. Consumed by their daily struggle to subsist, oppressed by the traditional hierarchy of caste and a colonial state apparatus that continued, even after Independence, to view the people as subjects rather than as citizens, Indians saw in democracy access to new lines of patronage and some additional material goods, delivered by politicians or the state, as inducement to part with their votes, come election time.

Suffrage did not transform the subaltern into empowered seekers of dignity, rights and emancipation from the hardscrabble wretchedness of unrelenting material and spiritual exploitation. People were eager to become labharthis, beneficiaries of largesse from politicians or the state.

Politicians need lots of funds to dole out to voters. Then, there are unsavoury political practices. TV crews don’t oblige every politician who crows about the size of his crowd by keeping their camera focused right in front of the dais, refusing to pan the camera to the vacant stretches beyond. So, what is the average politician to do but hire a crowd, paying them whatever it takes? That can cost serious money in towns.

Then there is the money paid to friendly voices in the media, for social media support, and the heavy-duty engineering job of splitting parties and toppling governments. These activities cost a lot of money. But your books of accounts cannot show a single rupee of spending on such laissez-faire. It must all be financed with money received off the books. So must all spending above the unrealistic spending limits set by EC.

End result: voluntary contributions account for a tiny fraction of a party’s funds. The bulk is amassed by extortion, sale of patronage and loot of the exchequer, via padded contracts awarded to characters who kick a portion of the padding back to the party/politician.

In an economy with a vibrant stock market, it does not pay to conceal income or earnings. You need your stock to be valued as high as possible, to raise loans against the shares or simply to improve your billionaire rank. So, money is taken out of corporate balance sheets, rather than the profit and loss accounts.

You inflate project costs, raise bank loans that the project doesn’t need but you do, for your war chest from which you pay off netas and their babu enablers. When your company acquires another company, some of the transaction value ends up in the war chest, routed through a network of shell companies in investor-friendly locations, knowledge of whose anatomy and physiology is what sets the evolved chartered accountant/tax lawyer apart from the hominid novices, who merely know accounting.

Indian politics’ systemic dependence on money off the books makes a mockery of financial reporting and corporate governance. Inflated project costs lead to inflated capital costs that jack up product pricing. If a power plant has padded costs, the power it produces would cost more than it ought to, and affect the competitiveness of eve rything produced using that power. So with steel, cement, coal.

What makes cost-padding relatively easy is that bank loans are sanctioned by a committee of lenders, who alone need to be persuaded of the validity of the numbers presented before them. Suppose, in contrast, the bulk of the project finance were to be raised by issuing bonds.

Bond issuances are vetted by all kinds of people, at brokerages, mutual funds, private equity, family trusts, venturesome CAs, investment divisions of banks, merchant banks, advisory firms, the occasional Hindenburg. Padding is likely to be spotted and publicly shredded, rather than glossed over.

Funding of large, long-gestation projects should be done by bonds, subscribed to by a broad class of investors, rather than by a clutch of banks that are ill-suited to commit their deposits to projects that can repay loans over periods much longer than the deposits’ maturity term. Bond issuances work only if there is a vibrant bond market, complete with the instruments to mitigate the kinds of congenital risk bonds carry — of not being repaid, of offering subpar returns and being issued in a suboptimal currency.

A functional bond market is necessary, but not sufficient, to revive private investment in infrastructure. It would reduce the problem of banks building up bad loans, and bring down project costs. That would make the economy more competitive and bring pressure to clean up political funding.

Electoral bonds were bearer bonds that probably had a secondary market during their short lifespan, and could be used to launder money. All political funding should be routed transparently through electronic means, via UPI, IMPS, Neft or RTGS. Let parties crowdfund themselves. In a democracy, money should move from the people to their parties, not from politicians to voters.