Reflect www. f i n a n c i a l e x p r e s s .

c o m 9 TUESDAY l JANUARY 29 l 2013

I
t is now well-known that the
nexus between Indian politi-
ciansandcriminalshasassumed
alarmingproportions. Roughlya
fourthof themembersof thecur-
rent LokSabha (the lower house of the
national Parliament) face pending
criminal charges.
A similar situation prevails in the
various state assemblies. Many of the
membersof thenational Parliament or
state assemblies have been indicted
with serious charges, including mur-
der. Not surprisingly, this has attracted
increasing attentioninboththe media
as well as in academic research. It has
alsoattractedofficialattentionwiththe
appointment of an independent com-
mission to analyse the phenomenon
andsuggest remedial measures.
The only legal measure designed to
prevent the influx of criminals into
Parliament andthe state assemblies is
the Representation of Peoples Act,
1951. ThisActspecifiesthatcandidates
will be barredfromcontestinganelec-
tion on conviction by a court of law.
Theperiodof disqualificationisforsix
years from the date of conviction, or
from the date of release from prison,
depending on the severity of the
charge. Unfortunately, this lawhardly
hasanybitebecauseof thewell-known
infirmities in the Indian judicial sys-
tem. In particular, governments typi-
cally drag their feet when it comes to
prosecuting local elites. Even when
cases are registered, inordinate judi-
cial delayimpliesthat thesecasesdrag
on, seeminglyindefinitely.
This is why the Election Commis-
sionhad proposed in2004 that the Rep-
resentation of the People Act, 1951
shouldbeamendedtodisqualifycandi-
dates accused of offences which carry
sentences of fiveyears or more as soon
as a court deems that charges can be
framed against the person. However,
the LokSabhaitself wouldbe required
topassappropriatelegislationtoimple-
ment the Election Commissions sug-
gestion. Obviously, such legislation is
against theinterests of alargenumber
of politicians, andsoitisnotsurprising
thattheElectionCommissionspropos-
al hasnot beenimplemented.
A landmark judgement of the
Supreme Court in2002 required every
candidatecontestingstateandnational
elections tosubmit alegal affidavit dis-
closinghisorherpersonal, educational
qualifications, as well as information
aboutpersonal wealthandimportantly
their criminal record. The court also
stipulatedthatwidepublicityshouldbe
giventothecontentsof theaffidavitsso
thattheelectoratecantakeaninformed
decision about who to elect to the as-
semblies and Parliaments. Unfortu-
nately, the Supreme Courts order does
not seemtohavehadmuchimpact inso
far as the influx of legislators with
criminal indictment isconcerned.
The continuing entry of large num-
bers of candidates with criminal
records into Indian legislatures raises
several questions. First, whydoparties
nominate such candidates? Given the
hugedemandforpartytickets, thenom-
ination of candidates with criminal
records suggests that such candidates
mustpossesssomeelectoraladvantage.
We discuss some hypotheses which
havebeensuggestedtoexplainthiselec-
toral advantage. Second, what is the
economic effect of electing candidates
witha criminal record? Third, what is
the response of voters to candidates
whohavereportedthat theyhavecrim-
inal chargesagainst them?
Asomewhat cursorylookat thedata
by simply looking at the ratio of win-
ning candidates to number of contest-
ing candidates amongst the criminal
andnon-criminal groups suggests that
criminal candidates have a higher
probability of winning. Perhaps, this
has givenrise to the feeling that crimi-
nals have an electoral advantage. The
followingfromAidt et al (2011) is repre-
sentativeof theprevailingview: Crim-
inals, we show, boast anextraordinary
electoral advantageinIndia.
We examine this issue within the
framework of an analytical model
which assumes that criminal charges
dogiverisetosome stigmaamongstthe
electorate. This stigma has a negative
effect on vote shares since voters are
less likely to vote for candidates who
have criminal charges levied against
them. Campaigning, the cost of which
isbornefromcandidates wealth, helps
a candidate to increase his or her ex-
pected vote share by winning over the
marginalvoter. Acriminalcandidate
gets an additional benefit since he can
usethecampaigningtoconvincevoters
of hisinnocence, andsoreducetheneg-
ative effects of the stigma associated
withcriminalcharges. Thisisplausible
sincethecandidates havenot beencon-
victed, but only charged with some
criminal offence.
We look at a Nash equilibrium of a
game in which the only strategic vari-
able is the amount of campaignexpen-
diture. We test the implications of this
simplemodelusingdataforthe2009Lok
Sabha elections. We find that the data
supports all the implications of the
model.Webrieflydescribethe principal
results. First, voters do penalise candi-
dateswithcriminal charges. That is, all
elsebeingequal, thevoteshareof acan-
didate with criminal charges is lower
than that of the one who does not have
any such blemish. However, this nega-
tive effect is reduced if there are other
candidates in the constituency with
criminal charges. Noticethat the nega-
tive effect of criminal charges on vote
sharesseemstocontradicttheprevalent
view that candidates with criminal
chargeshaveanelectoral advantage.
We do not have data on campaign
expenditure of candidates. However,
our model predicts that (i) the higher
the wealth of a candidate, the greater
will be his campaign expenditure, (ii)
campaign expenditure has a positive
effect onexpectedvote share, the mar-
ginal effect possibly differing across
the two categories of candidates
those with criminal charges, and
those with an unblemished record.
Putting these together, the models
predictionisthat expectedvoteshares
should be positively related to candi-
date wealth, with the marginal effect
perhapsbeingdifferent acrossthetwo
categories of candidates.
Since voters penalise candidates
withcriminal charges, whydopolitical
parties still nominate them when so
many candidates without criminal
charges fight to get their partys nomi-
nation? Aplausible explanationstarts
fromthepremisethatcandidatesfacing
the threat of criminal convictions are
more keen to contest the elections.
Their enthusiasm is easily explained.
Apart fromtheusual benefitswhichac-
cruetoall successful candidates, candi-
dates with criminal indictments look
forwardtoanadditional benefit. Inpar-
ticular, successful candidates (particu-
larly those belonging to parties in the
government) canwithhighprobability
either use coercion or influence to en-
sure that the local administrationdoes
not pursue the case(s) against them
withanyvigour. Moreover, thedatasug-
gestthatcriminalcandidatesaresignif-
icantly wealthier than those without
criminal charges.
Also, they are perhaps willing to
contribute a higher fraction of their
wealthto the party, or they ask for less
resources from the party. This simply
reflects the higher price or value that
they place on a party ticket. So, crimi-
nal candidates generate positive exter-
nalities tocandidates of their ownpar-
tysince their additional contributions
release party funds which can be used
inotherconstituencies.
Several recent papers offer explana-
tionsof whypartieschoosecandidates
with a dubious background. Banerjee
and Pande (2009) start with the obser-
vation that voters may have a prefer-
ence for candidates belonging to their
own ethnic group. This implies that a
politician belonging to the ethnically
dominant groupinaconstituencymay
win even if he is of lower quality.
BanerjeeandPande(2009) assumethat
parties do want to select candidates of
thebest quality.
Of course, the Banerjee-Pande hy-
pothesis does not explain why so many
candidates withacriminal background
contest elections. But, it does provide at
leastapartialexplanationof whythereis
anincreasingnumber of successful leg-
islatorsinstateassembliesaswell asthe
Lok Sabha with criminal background.
Vaishnav (2011) studies elections to 28
stateassembliesbetween2003and2009.
He finds that personal wealth of
candidates is positively associated
with criminal status where a candi-
dateisdefinedtobeacriminal if hehas
been charged with a serious crime.
The basic result is subjected to a vari-
ety of robustness checks. This leads
himtooffer thesame explanationthat
we have mentioned earlierparties
nominate criminal candidates simply
becausetheycontributelargersumsto
thepartycoffers.
Aidt. et al (2011) developaninterest-
ing theoretical model where they as-
sume that criminal candidates have
some electoral advantage, although
parties also incur some reputational
cost in nominating them. They are
agnostic about the sources of this ad-
vantage, but speculate that the elec-
toral advantage of criminals could
arise because they can intimidate
prospectivevotersof rival partiesinto
staying away from the polls. Notice
that this would imply voting turnout
should be negatively correlated with
number of criminals in a constituen-
cy. We showthat this is not true in the
2009 LokSabhaelections.
So, parties face a trade-off between
the reputational cost of nominating
candidates with criminal charges and
their electoral advantage. This trade-
off implies that parties would be more
willingtoincurthereputationalcostin
constituencies whichare likely to wit-
ness close contests since the electoral
advantage is more attractive in these
constituencies. Conversely, a party
wouldbeunlikelytofieldataintedcan-
didateinaconstituencywherethepar-
tyisverylikelytowin. Similarly, candi-
dates with criminal indictments are
more likely to be fielded inconstituen-
cies where the cost is lowerfor in-
stance, inconstituencies where voters
are poorly informed about the charac-
teristicsof thecontestingcandidates.
Our empirical results, along with
this bodyof evidencesuggests that it is
important for voters to be better in-
formed about candidate characteris-
tics. The mere requirement that candi-
dates file affidavits with the Election
Commission about their characteris-
tics is of limited use if voters do not
have access to this information. Per-
haps, theElectionCommissionneedsto
playamoreactiveroleindisseminating
this information. The Commission
must also think seriously about en-
hancing the existing ceilings on cam-
paignexpenditure since practically no
candidate or party adheres to the cur-
rent limits on expenditure. However,
the Commission must ensure that all
candidatesadheretotheenhanced(but
realistic) ceiling. This will thenat least
reducethewealthadvantageenjoyed
bytaintedpoliticians.
ExtractedfromtheNIPFPpaper
HowIndianVotersRespondtoCandi-
dateswithCriminal Charges: Evidence
fromthe2009LokSabhaElections
What makes criminals tick inpolitics
A combination of the right ethnic background, money and coercive power ensure the induction of criminals in our assemblies
I
have structured my invest-
ment themes for 2013 in two
ways. The first is geared to-
ward the current risk on cli-
mate, even though I doubt it will
endure. The other is a risk off
scenariothat I believewill unfold
once investors recognise the un-
sustainability of what I call the
GrandDisconnectbetweenrobust
securities markets and subdued
economicreality.
TheinvestmentsceneintheUS
and elsewhere is dominated by a
number of forces: the deleverag-
ing of private economic sectors
and financial institutions; the
monetary and fiscal responses to
the resulting slow growth and fi-
nancial risks; competitivedevalu-
ations; thefixationof investorson
monetaryeasethatobscuresweak
real economic activity; and cen-
tral bank-engineeredlowinterest
ratesthat havespawnedmoredis-
tortionsandinvestorzealforyield,
regardlessof risk.
Deleveraging: The financial
sectorbeganitshugeleveragingin
the1970s, as thedebt-to-equityra-
tiosof somefinancial institutions
leaped. The household sector fol-
lowed in the early 1980s. Thats
when credit-card debt ballooned
and mortgage down payments
droppedfrom20%, to 10%, to 0%.
We even reached negative num-
bers at the height of the housing
boom as home-improvement
loansaddedtoconventional mort-
gagespusheddebt-to-equityratios
above100%.
10 years
The deleveraging process for
both of these sectors has begun,
though it has a long way to go to
return to the long-run flat
trends. I foreseeabout fivemore
years of deleveraging, bringing
the total span to about 10 years,
whichis about the normal dura-
tion of this process after major
financial bubbles.
Ive consistently forecast aver-
age real US gross domestic prod-
uct growth of about 2% in this
age of deleveraging. Since the
process beganinthe fourthquar-
terof 2007,theaveragegrowthrate
has been 0.5%; it has been 2.2%
since the recovery started in the
secondquarter of 2009. Andnote
that recoveries from recessions
are typically much stronger
growth than long-term growth,
which averaged 3.6% from 1950
through1999. Yet since2000, when
theup- phaseof thelongcycleend-
ed and the down-phase com-
menced, real GDP growth has
averaged1.8%annually.
The average current rate of
growth is far below the 3.3% it
takes just to keep the unemploy-
ment rate steady. With 2% real
GDP growth, the jobless rate will
risealittlemorethanonepercent-
agepointayear. Nogovernment
left, right or centrecan endure
highandrisingunemployment.As
aresult, thepressuretocreatejobs
willremainstrong. Andsowillthe
hugefederaldeficitsthathavebeen
createdbyincreasedspendingand
weakertaxrevenue.
Once deleveraging is complet-
edinanotherfiveyearsorso, long-
termtrendgrowthof about3.5%a
year will resume. Biotech, robot-
ics, the internet, telecommunica-
tions,semiconductors,computers
andotherrelativelynewtechnolo-
gies promisetremendous produc-
tivityandeconomicgrowth.
Fornow, however, theimpactof
private-sector deleveraging is se-
vere. Economic growth remains
slowat best despite the fiscal and
monetarystimulus inthe USand
elsewheresince2008. As aresult,
responsibilitytoaidtheeconomy
hasshiftedtocentralbanks.
Quantitativeeasing: First, cen-
tral banks pushedthe short-term
rates they control close to zero
with little effect. They then
turned to experimental stimulus
underthelabelof quantitativeeas-
ingthe massive purchases of
government and other securities
anapproachthat hasbeentried
by the Bank of Japan for years
withoutnotablesuccess.
Dual mandate
The Federal Reserve, with its
dual mandate to promote full em-
ploymentaswellas pricestability,
isdealingwithaverybluntinstru-
mentinitsattempttocreatejobs.It
can raise or lower short-term in-
terest rates, andbuyorsell securi-
ties. But those actions are a long
wayfromcreatingmorejobs.
Incontrast, fiscal policycanbe
surgically precise, aiding the un-
employed by extending and in-
creasing benefits. And the Fed is
nowtryingtospurhousingbybuy-
ing residential mortgage-related
securities as a way to push down
mortgage rates. Yet the effect for
prospectivehomebuyershasbeen
largelyoffsetbyanumberof nega-
tiveforces,includingtightlending
standards, lowcredit scores, un-
derwater mortgages, lackof job
security, or unemployment, and
the realisation that for the first
timesincethe1930s, houseprices
candropsubstantiallyonanation-
widebasis.
Nevertheless, the Fed hopes
thatitsactionswillleadto jobcre-
ation. First,thecentralbankbuys
Treasuries or mortgage-related
securities. Then, thesellers rein-
vest theproceedsinassetssuchas
stocks, commodities and real es-
tate, pushing up prices. These
higher asset prices have a real
wealtheffectbymakingpeoplefeel
richer, leading them to spend on
consumer goods and services or
capital equipment. That spend-
ing, inturn, spursproductionand
demandfor labour.
So far, the Feds plan hasnt
workedveryefficiently. The7.8%
unemployment rate is still very
highbyhistorical standards. De-
spite a recovery, payroll employ-
ment remains well belowthepre-
vious peakinJanuary2008. And
cautious employers have turned
to temporary employees, who
generally are paid less and are
easiertodismiss.
Temporary and limited im-
pacts: QEs effects have beentem-
poraryandlimited. Eachroundof
easingbytheFedhasbeenaccom-
paniedbyajumpinstocksthaton-
lylasteduntil afreshcrisis inEu-
ropeortheUS.
Moreover, new debt doesnt
havetheGDPbangperbuckitonce
did. From1947to1952, eachdollar
inadditional debt was associated
with$4.61inadditional real gross
national product. From 2001
through the second quarter of
2012, itwasamere8cents.
ECBpurchases
The EuropeanCentral Banks
programme to buy one- to three-
year sovereign debt is unlimit-
ed,anextraordinarypledge. The
Bank of Japan plans to start its
unlimited lending programme
to Japanese banks in June 2013
andexpectstodisbursemorethan
$175billionin15months.
The Feds latest pronounce-
mentsareopen-ended,too. Opera-
tion Twist involved buying $45
billionamonthinlong-termTrea-
suries while selling $45 billion in
short-term obligations. Now the
short-termselling is over andthe
$45 billion purchases add to the
Feds$40billionamonthpurchas-
es of mortgage-backedsecurities,
the second round of quantitative
easing. This means $85 billion a
monthinadditional reserves for
memberbanks.
Inaddition, theFedwill contin-
uetokeeptheshort-term interest
rate it controls closetozerountil
the unemployment rate drops to
6.5%, and as long as the Fed sees
long-run inflation expectations
close to 2.5%. The central bank
doesnt expect theseconditions to
bemetuntil2015.
This is transparency at its ex-
treme. Wheres the mystery, the
uncertaintyoverFedactionsthat
keeps markets honest? The Fed
canalwaysredefineitstargets,but
wouldnt that seriouslyimpairits
credibility? The central bank
hasntcovereditself inglorywith
its recent economic forecasts, in-
cludingits estimateinNovember
2010 for 2012 real GDP growth of
4.1%, which was cut to 1.75% in
December2012.
And suppose the unemploy-
ment ratefalls to7.5%andthento
6.8%. Marketsarentlikelytowait
for it to reach 6.5% before Trea-
suries are dumped and interest
ratesincrease.
Some Fed policy makers may
behavingsecondthoughtsabout
the central banks open-ended
policies. Minutes of the Feder-
al OpenMarket Committees De-
cember 11-12 meeting at whichit
set the 6.5%unemployment-rate
target showadividedviewabout
quantitativeeasing.
If theFedbuysbondsatthecur-
rent pace through the end of the
year, it will beadding$1.02trillion
to its $2.9 trillion portfolio. End-
ing the programme could send
shockwaves through markets,
whichhave grownaccustomedto
repeatedFedstimulus.
Further expansions
StrainsontheFedscredibility:
In his Aug. 31 speech in Jackson
Hole, Wyoming, Fed Chairman
Ben Bernanke said a potential
cost of additional securities pur-
chases is that substantial further
expansions of the balance sheet
couldreducepublicconfidencein
the Feds ability to exit smoothly
from its accommodative policies
attheappropriatetime.
Even if unjustified, he added,
such a reduction in confidence
might increasetheriskof acostly
unanchoringof inflationexpecta-
tions, leading inturnto financial
andeconomicinstability.
This is a serious threat.
Bernanke has stated that the Fed
could easily get rid of excess re-
servesbydeciding, ina15- minute
policy-committee phone call, to
sellsecuritiesfromitsportfolio.
Consider what would happen
about five years from now when
deleveragingis completedandre-
al growthmoves fromabout 2%a
year to its long-runtrend of 3.5%
ormore.Eventhen,itwouldtakeat
leastseveralyearstoutiliseexcess
capacity and labour. And when
Wall Street gets theslightest hint
that the Fed is thinking about re-
movingtheexcessliquidity, inter-
estrateswillleapandthedangerof
an economic relapse will seem
very real. Political pressure on
theFedmightbeintense.
Afterabout10yearsof delever-
agingandsloweconomicgrowth,
the central bank might well be
charged with taking away the
punchbowl beforethepartyeven
got started.
Bloomberg
Why deleveraging still rules markets in2013
Thankstodeleveraging, US output growthwouldnot crossmorethan2%for at least 5moreyears
R
O
H
N
I
T
P
H
O
R
E
Criminal candidates generate positive externalities
to candidates of their own party since their
additional contributions release party funds which
can be used in other constituencies
The impact of private-
sector deleveraging is
severe. Economic
growth remains slowat
best, despite the fiscal
and monetary stimulus
in the US and elsewhere
since 2008. As a result,
responsibility to aid the
economy has shifted to
central banks
AGARYSHILLING
BHASKARDUTTAAND
POONAMGUPTA