Economic liberalisation was meant to shift the allocation of economic resources to one based on the price mechanism, limiting the discretionary powers of fallible government functionaries. The reduced role of the state in the economy should in time have reduced or at least mitigated the political stakes in capturing the state, which in turn should have reduced the need to raise money for elections and thereby corruption. Reality, however, has been very different. Instead of this virtuous cycle, almost the opposite seems to have happened. Electoral expenditures in India appear to have increased manifold and, with it, so has corruption. What explains this paradox?

There are several plausible explanations. The simplest is that this is simply an artefact of a much larger economy and greater visibility. The Indian economy is more than four times its size two decades ago. And the media – especially television – is a completely different animal than in the earlier period. While both are true, there is little doubt that the money deployed for elections and levels of corruption are much greater today than two decades ago.

The more plausible explanations are rooted in transformations in the structure of Indian politics and economy over the past few decades. On the political front, population growth has considerably increased the size of constituencies. The median state Assembly constituency contains more than 150,000 inhabitants, while larger parliamentary constituencies boast between 1.5 and two million people, which means that candidates have to spend more to woo potential voters.

Second, there has been a marked increase in the competitiveness of Indian elections and a concomitant fragmentation of the political party system. This shift has been especially marked since the 1989 elections. Over the past 50 years, while the number of national parties contesting elections increased from four to seven, the number of state parties doing so increased from 16 to 370. The number of parties represented in Parliament has tripled, while the effective number of parties (a measure that adjusts the number of parties by weighing them by their relative strength) has doubled when weighed by vote share or almost quadrupled when weighed by share of seats — all testifying to much greater competitiveness and fragmentation in the Indian polity.

Third, political parties have weakened. Since few political parties are genuine cadre-based organisations any more, and membership dues are minimal (ranging from Rs 5 to Rs 25), internal sources of party funds are completely inadequate for contesting elections. With few dedicated cadre, electioneering now requires additional expenses since self-motivated party workers have to be boosted by paid workers. And most political parties are controlled by charismatic leaders whose authoritarian writ on their parties leaves little room for intra-party democracy and primary elections. Indeed many political parties are tantamount to family-owned businesses and, like all such businesses, will tend to maximise returns to their “owners”. Election finance today is, therefore, much like venture capital. The probability of success (of winning elections) is low, but if you do succeed, there’s a windfall waiting.

Fourth, the 73rd and 74th Amendments have exponentially increased the number of local elections in India. Political parties field candidates at all three levels, even at the village level where formal partisan affiliations are prohibited. The nearly three million elected positions to India’s democracy are gradually transforming local government — but are also putting additional pressure on the need for election finance.

Finally, the rise of identity politics as the principal cleavage of electoral competition has exacerbated adverse candidate selection effects. While identity politics has undoubtedly improved the representativeness of India’s democracy, there is little doubt that these electoral dynamics have considerably enhanced the emergence of “money and muscle” in Indian politics (the latter referring to candidates with criminal antecedents), as carefully documented by Milan Vaishnav1.

While any of these factors would independently increase the pressure to raise money from outside sources, their combined effects have substantially amplified the demand for money in Indian politics.

The adverse selection problem has been exacerbated by the fact that institutional changes, necessary to underpin a well-functioning market economy, have been limited in degree — especially in contrast to how wide-ranging the economic transformation that has occurred in India has been. Even as the role of government has changed, the administrative structures of government have barely budged — in particular the non-electoral accountability mechanisms that are critical to disciplining errant actors in a market economy. Perhaps the single biggest exemplar of the combined effects of an adverse selection problem and changing institutional norms is the virtual absence of any sense of shame when politicians and political parties are caught with their snouts in the trough. The sheer brazenness of the Indian political class is a reflection of what happens when rapid social and political change combines with raw capitalism and weak institutions.

Several years ago, Pranab Bardhan had argued that corruption in India occurs in the breaking of laws while in the US it occurs in the making of laws. As many of the recent scandals show, India has been learning from the US, another democracy hobbled by the sharp increase of money in elections. Politicians have realised that making money through bribes is chump change compared to the wealth they can aspire to by focusing on lawmaking (especially administrative law).

While innumerable reforms have been proposed, changing the system is going to be exceedingly difficult for obvious reasons. Well-meaning efforts such as those from the Election Commission can easily run afoul of the iron law of unintended consequences. As Rajeev Gowda and E Sridharan2 recently argued, India’s complex laws on election expenditures, political party funding and disclosure may have had perverse impacts by driving campaign expenditure underground and thereby increasing reliance on ‘‘black money’’. In turn, this has led to adverse selection in the quality of candidates willing to enter electoral politics.

Any possibility of meaningful change will require at least two reforms. One, the Election Commission must be authorised to regulate the internal affairs of political parties (as in Germany) and their finances must be subject to audit by an external body such as the Comptroller and Auditor General, with serious consequences for regulatory non-compliance. It is ironic that the organisational form that has such a large impact on the fortunes of a sixth of humanity – a political party – is perhaps the least regulated body in the country. And second, the threshold for recognition of political parties has to be raised to reduce fragmentation. There is undoubtedly a trade-off with representation, but the balance seems to have gone to such an extreme as to pose serious risks to the country’s future.

1 Milan Vaishnav, “The Merits of Money and ‘Muscle’: Essays on Criminality, Elections and Democracy in India”, PhD Dissertation, Columbia University, 2012.

2 M V Rajeev Gowda and E Sridharan. 2012, “Reforming India’s Party Financing and Election Expenditure Laws”, Election Law Journal, 11 (2):226-240

The writer is director of the Centre for the Advanced Study of India at the University of Pennsylvania