Politics of Arbitrage

The Concise Oxford Dictionary defines arbitrage as ‘the buying and selling of stocks or bills of exchange to take advantage of varying prices in different markets’. Politics, among other things, are the ‘activities concerned with the acquisition or exercise of authority or government’.

Two painful events – the brutal murder of Manjunath, a bright, young, upright IOC Sales Officer, by the Diesel adulteration mafia, and the expose of several Members of Parliament demanding and accepting money for asking questions in the House – have demonstrated how arbitrage has taken a hold over our politics and state-controlled business. In many ways, both events are linked, and lay bare the distorted incentives in politics and the grievous consequences the nation faces.

Let us take the Manjunath murder. Behind the tragedy and crime lie profiteering, dangerous fusion of crime with business in some sectors, political patronage in creating commercial opportunities, and the perverse role of the state. The proximate cause of Manjunath’s death may be the bullets fired by a gangster-businessman who wanted to eliminate an incorruptible official who would not tolerate adulteration of diesel with kerosene. But the real causes are more complex. First, for decades, oil dealerships have been awarded in most cases for a price, or as patronage. The state had monopoly, and ministers and their cronies converted their opportunity into profit. Second, once the dealer paid hefty bribes, he expected decent returns. But given administered pricing distorting markets and competition, the margins were inadequate to meet the hidden costs including the haftas paid to many inspectors – vigilence, weights and measures, civil supplies etc.

Third, in our anxiety to help the poor, wrong policy choices are made. Instead of providing direct subsidies through coupons or other means, price subsidies are offered on kerosene. In fact, kerosene consumption is not growing as fast as that of petrol or HSD. From 1984 to 2004, petrol consumption increased from 2.1 million tones (mt) to 8.3 mt (300%); and HSD consumption from 13.7 mt to 39.7 mt (200%); kerosene consumption increased more modestly, from 6 mt to 9.4 mt (57%). Clearly, the fuel and lighting needs of the poor are met by other fuels. And yet, vast subsidies are given in the name of the poor.

Fourth, as oil dealerships are obtained through patronage and bribery, and as margins in honest business are slim, dealers indulge in short-delivery and adulteration with subsidized kerosene. 5-10% short delivery by tampering the meters in connivance with the legal metrology officials was very common a decade ago. Lok Satta volunteers successfully stopped short delivery in 1998 by a simple technique of demanding filling of a calibrated can of known volume, instead of the fuel tank of the vehicle. This exposed short delivery, and within a fortnight the meters were set right in all the 1500 petrol stations in Andhra Pradesh, and random checks by volunteers made it sustainable. Eventually, oil companies acted with vigour and substantially reduced short delivery all over the country. But given the other compulsions of huge bribes for dealership and regular ‘rents’ paid to state officials, the demand for illegal profits was undiminished. This profiteering is made possible by adulteration of diesel with subsidized kerosene. Short delivery can be stopped by citizen assertion, but adulteration can only be suspected by using a hydrometer to measure density, and can be proved by chemical examination. The citizens are not empowered to measure density, and results of chemical analysis constitute evidence only when the samples are taken by competent authorities in the prescribed manner, and tests are conducted in authorized laboratories. Therefore proving adulteration demands great integrity and perseverance, not to speak of efficiency and fairness in the whole process, on the part of officials.

Finally, this whole causal chain led to a system of rent seeking everywhere. Public money was wasted on subsidies which never reached the poor; dealers who purchased their licenses through huge bribes fully exploited the arbitrage opportunities, and an organized system of rent-seeking was established. In this vicious cycle of corruption, most players were helpless to resist the system, as the price paid for resistance far exceeds the benefit. Manjunath payed the ultimate price.

The money-for-questions scandal is a more straight forward case of arbitrage. But the nature of our politics and the demands made by the political system are at the root of the problem. In our electoral system, the marginal vote that a candidate obtains is the difference between victory and defeat. Candidates therefore spend vast amounts, mostly illegitimately to buy the vote, bribe officials and hire muscle men to browbeat the voters. Large, illegitimate expenditure does not guarantee victory, but modest, legitimate expenditure almost certainly guarantees defeat! Trapped in this vicious cycle, candidates overspend, and once elected, need multiple returns on investment to sustain the system. Given the control over levers of state, politics is seen as an arbitrage opportunity. Money is made mostly by transfers, contracts and interference in crime investigation. MP LADS and other such direct access to state resources are rent-seeking opportunities. In general, influence peddling in decision making in government is financially very rewarding for legislators. The more desperate legislators seek money for questions.

In any system, there are always a few black sheep. But the political crisis in India is much deeper, and cannot be resolved merely by fiery denouncements and a few expulsions. Parliament and parties should wake up, and transform current politics as business and arbitrage by reforming our electoral system and eliminating the distorted incentives. We need to herald a new political culture, and make honesty compatible with politics and power.

Reflections on the Current Political Crisis

• The current spate of sting operations exposing MPs of various parties accepting bribes has made nationwide headlines. To dismiss the problem as one of corruption and to limit our concerns to the MPs caught accepting bribes is taking the escapist’s route, for the issue is much deeper.
  
  
• The whole political system in India is founded on corruption. Crores are spent on elections. Recent estimates suggest that in a 5-year cycle, major political parties and candidates spend about Rs. 10,000 crores on elections to the Lok Sabha and State Assemblies. Most of these expenses are not legitimate campaign costs but money spent to buy votes, bribe people or hire musclemen.
  
  
• Recently in the Andhra Pradesh municipal elections, (excluding the two largest cities of Hyderabad and Vishakapatnam), the cost of elections was an estimated 500-700 crores. This in a situation when municipalities in Andhra Pradesh are largely titular bodies with very few powers and resources! Kanakapura by-election in Karnataka, held about 2 ½ years ago, cost an estimated 20 crores. That by-election in fact was fought with very few stakes, as the elected member would have had less than 18 months as MP. As luck would have it, the Lok Sabha was dissolved prematurely and that tenure was further truncated! More importantly, whoever won, would have been in opposition as both Shri. DK Sivakumar of Congress and Shri. Deve Gowda of Janta Dal (S), were opposed to the that ruling NDA combine. The eventual winner Shri. Deve Gowda was believed to have been outspent by Shri. Shivakumar by a margin of 3:1. Saidapet assembly by-election in Tamil Nadu held about 2 ½ years ago also saw a phenomenal expense of about 5-10 crores.
  
  
• The evidence is clear that large expense does not always guarantee victory. But modest, legitimate expenditure usually ensures defeat. Instead of blaming the politicians alone for this mess, we should look at deeper causes.
  
  
• Our First-Past-The-Post system ensures victory to a candidate who garners more votes than any other rival. That is, the marginal vote a candidate brings to the table is of vital consequence in determining the outcome. As a result there is enormous competitive pressure to obtain the marginal vote, over and above the large chunk of vote the party guarantees. Therefore the candidates with abnormal and unaccounted money power, local caste clout, ability to deploy muscle power and strong family roots in politics have a decisive advantage in mobilizing the marginal vote. Understandably, all major non-left parties are compelled to nominate such candidates in order to maximize their chances of victory.
  
  
• As a result, no matter which candidate or party wins, the parameters of governance remain unaltered. Most of the candidates who win are forced to invest large sums of money to get elected. Such a system is unsustainable unless multiple returns are guaranteed.
  
  
• Not surprisingly, the legislators of the governing party at the state and national level have been making money mostly through transfers, contracts, influence peddling and interference in policing as their parties are in government. Members of opposition are more dependent on questions in legislature, their nuisance value and discretionary grants like MPLADS.
  
  
• Candidates and parties in general are locked into this vicious cycle and they are often as much helpless victims of an inexorable process as they are willing accomplices perpetuating a corrupt and dysfunctional system.
  
  
• The answers therefore lie in two broad directions:
  1) Importance of the marginal vote must be eliminated
  2) The legislator’s ability to influence discretionary executive decision on a day-to-day basis must be significantly curbed.
  
  
• It is time that we convert the current political crisis and scandal as an opportunity for meaningful political reform to cleanse our public life. Mere expression of shock and disgust is not enough. Even expulsion of members is not sufficient. Parties, media and democracy movements must stand together to transform the process of power and evolve a new political culture which can sustain integrity and promote public good.
  
  
• Lok Satta and VOTEINDIA movement are working precisely in this direction. We are evolving specific political reforms to address these questions, and meaningful strategies to drive the reform agenda. (More on this shall be posted soon.)
  
  
  

The problem of urban transportation

Absence of meaningful public service infrastructure and urban amenities has resulted in small villages getting depopulated and increased the problem of urban migration. Our cities are bursting at their seams. Providing urban amenities to rural towns maybe a possibility to curb the influx of rural people into cities, but this is no substitute for proper urban planning and development.

Urban transportation in particular continues to be a nightmare paralyzing people’s lives everyday. Flawed public policies have aggravated this urban transport crisis caused by rapid urbanization. Increasing propensity to spend on private transportation by an urban few compounded by the government’s inability to enhance public transportation has in turn caused immense difficulties to the poor.

Through this article (click here) on urban transportation published in the Financial Express, I have highlighted the issues currently plaguing urban transportation in India and placed the issue in perspective through a few statistics.

The Bihar Verdict – A Cry for a New Beginning

The outcome of the Bihar elections is stunning in its scope as well as in its nature. Once again, the illiterate, long-suffering people rose above caste and religion in search of a better future, and proved the psephologists and pundits wrong. This capacity to transcend narrow loyalties and express the collective will with calm grandeur has been the saving grace of our otherwise flawed democracy. This happened in 1971, when people were fired by hope; in 1977, when they were outraged by the fetters imposed on liberties; and several times thereafter all over the country. Clearly, our democracy is vibrant, and there is hope, if only we harness these opportunities for a greater cause, and not squander them in personal aggrandizement.

Beyond the majesty of people’s will which can make or unmake governments, there are six lessons of Bihar which should be internalized in order to strengthen democracy and make politics a true instrument of people’s mobilization for public good.

First, this verdict once again proves that ultimately short-term ploys and political shenanigans are counterproductive. To take only one instance, Laloo Yadav was desperate to retain power by proxy even after people rejected his brand of politics in the earlier round of elections. Governor Buta Singh acted in the sad tradition of many governors in a blatantly partisan, self-serving and crude manner by recommending the dissolution of the newly elected legislature. The Union Cabinet acted with indecent haste and advanced disingenuous arguments to advise dissolution to the President. And the President, in a moment of poor judgment, acquiesced, instead of forcing a reconsideration of the Cabinet. The paradox is that an unstable Nitish Kumar led government with defectors and time servers would have been preferable to the now stable majority with a clear mandate to set governance right. Just desserts, indeed! The co-conspirators who wanted to perpetuate misgovernance inadvertently ended up strengthening democracy and giving a chance to Bihar to rejuvenate itself!

Second, caste and religious cards work only up to a certain point in elections. Laloo’s slogan of social justice, his steadfast advocacy of secularism, and his consistency and reliability in political alliances are commendable. His failure to deliver and his penchant for plunder must not cloud our judgment. But by equating social justice with caste assertion, and secularism with pandering to minority fundamentalism, he has done great disservice to both. The consequent fusion of caste and religion with political mobilization has torn society apart, and bred mistrust and anger. Animosity of other social groups – the most backward castes and Dalits which suffered neglect, discrimination and prejudice, made them even more determined to oust Laloo’s blatantly partisan, reckless misrule. In a complex and diverse society with enormous baggage of the past, caste cannot be ignored as a political issue. But it must be handled with integrity and sensitivity, not as a crude tool for political assertion, or else it will lead to society’s decline and political failure. That is the lesson of Laloo’s unapologetic use of the M-Y card.

The third, even more important, lesson lies within the dangers politics of identity pose to democracy. When primordial loyalties are aroused and people are actively encouraged to assert their caste and religious identities as a way of political mobilization, their real interests suffer. Their own children’s future is held captive to the search for chimeras. As a result, vote is mobilized not on the basis of real and direct gains in terms of improved opportunities and quality of life, but as a stable block of people with unswerving loyalty, motivated by anger, fear, or misplaced chauvinism. The floating vote is the key to democracy’s survival. If all people vote predictably, based on their caste and religion, we will revert to feudalism. Stagnant vote with stable majority based on ethnicity destroys all possibility of improvement, and perpetuates plunder and injustice. That is what happened in Bihar. Politics of caste identity must give way to politics of individuation, which allows people to perceive their own enlightened self-interest, and act rationally in pursuit of rule of law, education, healthcare and employment. Caste certainly is a reality that cannot be ignored, and collective neglect and discrimination on caste grounds must be effectively addressed. But politics must move from caste rigidities to individual interests if vote is to acquire a positive meaning, and democracy is to lead to prosperity and greater public good, instead of collective stagnation.

Fourth, social justice and secularism will be real only when state promotes dignity, justice and opportunities for vertical mobility. There cannot be a quest for justice without rule of law, education, healthcare, empowerment of citizens, infrastructure, and employment opportunities. A government, which ignores the real issues of people in the guise of political slogans, is merely perpetuating inequity, injustice and backwardness. We see many so-called leaders with a vice like grip over their constituencies, consciously allowing stagnation and perpetuating backwardness and underdevelopment. Their political hegemony could be challenged, if people become more enlightened! This gulf between political rhetoric and quality of governance has been endemic to our polity. Laloo Yadav merely practised it on a grand scale, covering a whole major state. Indian polity must rediscover the mission of governance in a modern society.

Fifth, past experience shows that a change of guard at the polling booth does not necessarily guarantee better outcomes. In fact, the contrary has been the pattern. Mere change of players does not mean much; we need a change in the rules of the game. Nitish Kumar must stay the course. The spirit of idealism, and the awe and respect that electoral verdicts momentarily inspire must not give way to cynical real politic. NDA has compromised as much as UPA in the Bihar elections by fielding criminals and corrupt elements. The fear of losing election, and hope of pipping past the post with the help of money and muscle power are forcing parties to cohabit with mafias, murderous gangs and extortionists. Clearly, people have more confidence in our political process than politicians and parties have in people’s good sense. Laloo in 1989 started off with the same advantages as Nitish now. But in time, idealism gave way to cynicism and plunder. In many ways, most of our politicians are not villains; they are victims of a vicious cycle. Bihar’s troubles are not of recent origin. The JP movement was largely fashioned in Bihar against corruption and misgovernance, and it finally led to emergency and the emergence of Janata. 1980’s saw Congress misrule under Jagannadha Misra. 1990’s saw Laloo’s misrule. To change course in Bihar, one election or one change of guard is not enough. The people of Bihar need sustained efforts, and the support and good will of all Indians. If UP and Bihar die, India will die, too. The fight is not for Bihar’s future alone. In a fundamental sense, India’s future is at stake.

Finally, it all boils down to one question. What kind of political culture will prevail in India? Will democracy be reduced to family fiefdoms, personalized despotism, endless plunder, extortion, politics as business, power as an end in itself, private gain, and public loss? Or will power be seen as a means to public good, and politics as service? An ugly political culture evolved over time: abuse of power became the norm, and might has become right. We need to restore rule of law and a new political culture based on constitutional values and humanism not merely in Bihar, but all over India. Large parts of India are now reduced to feudal fiefdoms, with the law of the jungle operating. There is a bit of Bihar in every state of India. In the 1830’s, the British had to raise a large army of over 100,000 to suppress the pindaris pillaging central India, and they fought a six-year war. 58 years of flawed political culture led to atavism in many pockets. It is time we transformed the nature of parties, and established a truly democratic political culture, which restores nobility to politics and purpose to governance. Bihar’s verdict is not about a party winning, and another losing; it is the anguished cry of millions for a new beginning for all of India