Costs of Democracy is a new book on money and politics in India. Devesh Kapur has just been appointed Starr Foundation South Asia Studies Professor and is Asia Programs Director at the Paul H Nitze School of Advanced International Studies (SAIS) at Johns Hopkins University and Milan Vaishnav is Senior Fellow and Director of the South Asia Program at the Carnegie Endowment for International Peace, have put the book together. They tell Aditi Phadnis how India's democracy is financed.

Your latest edited volume, Costs of Democracy, is about to be published. Tell us a little bit about the book.

Milan Vaishnav
Milan Vaishnav is a senior fellow and director of the South Asia Program and the host of the Grand Tamasha podcast at Carnegie, where he focuses on India's political economy, governance, state capacity, distributive politics, and electoral behavior.
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If we step back for a moment, it is pretty clear that democracy is under stress worldwide. There are multiple reasons for this. But perhaps one of the most damaging attacks on the virtues of democracy is the inability of representative governments to regulate the flood of money in politics. Ironically, the problem is structurally part of democracy itself. While it is impossible to conceive of democracy without elections, it is equally impractical to imagine elections without financial resources. This conundrum is not new. It goes back to Plutarch two millennia ago who argued that the corrosive effects of money led to the fall of the Roman Republic.

Our sense is that four trends make the current scenario more challenging. First, parties have weakened globally, which has increased their dependency on external funding. Second, polarisation appears to be increasing in many democracies, raising the stakes of elections. Third, income inequalities have grown to unprecedented levels, drawing attention to imbalances in the concentration of power. And fourth, politics has emerged as an entrepreneurial activity in its own right. Investing in elections is an investment decision with low probability of winning but high pay off if one wins. If you are an investor, would you rather invest in a manufacturing plant with constant regulatory headaches and global competition, or in something where you are the rule-maker and competition is domestic?

The rising costs of democracy are cause for concern, not simply because of the significance of the funds involved, but also due to the broader impacts money can have on political behaviour. For instance, money has a powerful ‘selection effect’ on who stands for election. Raising money from supporters also incentivises quid pro quos in policymaking. Rising election costs also contribute to growing inequality. The result could well be a polity that is more responsive to the preferences of the rich. But perhaps most seriously, even the perception of money ‘buying’ elections can undermine citizens’ confidence in the democratic process itself.

Our book sheds light on these questions and examines the methods, sources, and implications of political finance in India.

What matters most in winning an election: Wealth and the capacity to raise funding? Criminality? Or education?

In India, money has become the sine qua non of politics. 82 per cent of Members of Parliament elected in 2014 are crorepatis. That is up from just 30 per cent in 2004, which is massive even taking inflation and India’s growth into account. Unless you have significant personal wealth or access to major fundraising networks, it is very hard to make it in Indian politics today. There is a shrinking window for the aam aadmi; after you account for candidates with criminal reputations, dynasts, and celebrities, there’s not much space for anyone else. What do they all have in common? Money. There is a misperception that money buys elections in India. Money does not guarantee victory; what it does is guarantee you a seat at the table.

Builders, politicians and election finance offer an intriguing nexus. How does this work?

There is a strong link between the regulatory intensity of a sector and its rent extraction potential. In a chapter in this volume, Milan and I examine the relationship between the real estate and construction sector — where the state’s heavy regulatory footprint is well-documented — and election finance. While it’s generally believed that builders contribute heavily to political campaigns in exchange for regulatory forbearance, the opacity of the contributions makes it hard to nail this down. In our chapter, we leverage a staggered calendar of state elections and monthly data on cement consumption, an indispensable ingredient in any construction project. The real estate sector in India is an ideal money laundering vehicle, especially for politicians. This sector has limited access to bank finance and relies heavily on ‘non-official’ sources of finance — often from politicians, who also control the rules and regulations in the sector. We find that the consumption of cement significantly declines during the month of elections, which is consistent with builders’ channeling cash from their activities into political campaigns. The resulting liquidity squeeze in this sector pushes down construction activity and with it the demand for cement. Onerous land and building regulations persist in the Indian economy, in part because they provide the rents that underpin campaign finance.

India has had many, many coalition governments, both at the centre and in the states. There is a general perception that coalitions lead to costlier elections and elevated rent-seeking. Yet Kerala has been running coalition government for years without any appreciable increase in rent-seeking or costlier elections. Similarly, the last Assembly Election in Tamil Nadu was arguably the costliest ever. But the role of coalitions was minor.

One needs to distinguish between two types of coalitions. The Kerala model is one with stable pre-electoral seat-sharing and portfolio-sharing arrangements. West Bengal was the same under the CPM-led coalition. The other model — as in Karnataka currently — is a post-election marriage of convenience, driven by the need to keep a common enemy out. The former case is stable with concomitant stable rents. The latter is less stable and can rapidly degenerate into escalating rent seeking behaviour as the politicians in power rush to make money if they think the government will crumble. The point you make about Tamil Nadu is an interesting one. Indeed for all the bemoaning about weak governance in the Northern states compared to their Southern counterparts, far more money is spent in elections in the latter than in the former. It says something about the intensity of corruption but also the wealth divergence between the two regions.

How did demonetisation affect elections?

From the perspective of the Bharatiya Janata Party (BJP), one of the ancillary benefits of demonetisation was to disadvantage smaller, regional parties who might have an outsize reliance on cash. At the very least, these parties lack the same diversified funding streams the BJP can count on. However, it is not at all clear that other parties were vitally wounded by demonetisation. The five states that went to polls in early 2017 immediately following notebandi, saw unprecedented seizures of cash, liquor, and other pre-election goodies amounting to Rs 350 crore (or three times what was seized in the 2012 polls). In the recent Karnataka elections, the cash seized was five times than what was seized in the last assembly elections. After the 2017 UP election, one ECI official was quoted as saying that the massive cash haul was proof that “demonetisation has had no effect on use of money power in elections.” So the short-term evidence on demonetisation does not indicate a massive shift in election funding.

The Aam Aadmi Party represents a totally new model of political mobilisation and funding. Does it?

In its early days, the Aam Aadmi Party distinguished itself in two ways. First, it adopted internal party democracy, something almost no other major party could claim. The idea was to hold elections at every level of the party and to engage local citizens who could provide feedback on potential candidates. The second innovation was total transparency on political funding. The AAP leadership pledged to post every paisa it received on the party’s website and to provide real-time updates with details of donations by date, amount, and location. Unfortunately, the AAP has reversed course on both fronts. In its functioning, the AAP increasingly resembles most other political outfits. It is a top-down party with a charismatic leader who has little room for dissent. It also has stripped any pretense to the strict code of transparency on political funding it once touted. While researching the book, the webpage listing political donations was perpetually listed as “under construction.”

This article was originally published in the Business Standard.