India: Viewing the independence of CBI from the lens of public choice theory

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by Shubhankar Tiwari ans Snehil Tiwari      6 April 2021

 

Introduction

In this piece, we have followed a two-pronged approach. Firstly, we have examined the importance of CBI as a fourth-branch institution. Secondly, we have analyzed how an independent CBI can impede the furtherance of the political leadership’s self-interests with the help of public choice theory.

Importance of CBI as a Fourth-Branch Institution

Fourth-branch institutions or ‘independent oversight and regulatory institutions’ are public bodies that are politically neutral and autonomous from the government’s three principal branches.  Their purpose is to improve the quality and resilience of democratic governance. They do so in two ways: [A] by segregating the State’s activities from partisan politics; and [B] by establishing a dedicated mechanism for scrutinizing other State activities that are presumably carried out for public welfare.  However, these institutions don’t necessarily ensure the accountability of the government. Often they might adopt a passive approach towards their role and indulge in bribery or partisan behavior, thereby undermining their credibility and legitimacy. The demand for an independent oversight institution arises as a solution to specific problems. In the case of CBI, there was a need for an investigative agency to probe the charges of corruption and bribery against government officials, which led to its formation.  However, its scope was later enlarged to cover offences, even those that might have inter-state or international ramifications.  This shows the importance of CBI as a key fourth-branch institution in affixing the executive’s accountability, which carries out its functions through a machinery consisting of a set of professional officers trained for the same.

CBI and The Public Choice Theory

Public Choice Theory, also known as the Economic theory of legislation, perceives legislation or law as a commodity demanded by an interest group and supplied by the lawmakers. The interest group is a set of organizations or groups of people who come together and pool in resources to lobby or demand a law to be formulated.  Ensuring public welfare is something that the Indian Constitution seeks to achieve. However, such laws are often given effect regardless of the social costs incurred due to their enactment.  This is particularly because lawmakers may not always be driven by public interest. They might indulge in activities that further their self-interests, as opposed to the interest of the public at large. Lawmakers’ self-interests may include any monetary or other consideration that helps them stay in power. Interest groups with a large pool of resources generally provide such consideration to lawmakers in return for a wealth transfer law.

Rent-seeking behavior can be understood as an attempt to acquire economic rent through government intervention in the market.  Economic rent can be understood as surplus income in excess of the cost of production. Rent-seeking activities may include horse-trading, illegal bribery, and corruption, or organized lobbying. Interest groups generally indulge in such activities to seek a wealth transfer law (such as a government-created monopoly) instead of a law that is aimed towards public welfare. Such laws are clearly not in consonance with the constitutional ethos, as observed by the court in Mangalore Ganesh Beedi Works v Union of India.  The court adopted the reasoning that the interest group-centric legislations aim to transfer wealth from weaker sections to dominant groups of society.  Hence, such legislations widen the existing inequality, as opposed to furthering social welfare.

The aforementioned concepts can be explained with the help of an example. In the early 1990s, it was decided by the government to allocate some coal blocks to private players in the market. However, only certain private sectors such as cement, steel, and thermal companies were allowed to mine coal, and they constituted the interest group. The companies did not have to pay any royalty for the mined coal. Ideally, the natural resources of a country are owned by its citizens at large. However, this interest group-centric law affected a transfer of wealth in favor of those who provided political support to the government. This led to the creation of a monopoly of certain private companies and subsequently resulted in deadweight loss.

Transaction cost refers to the resources that interest groups expend to obtain wealth transfer legislation.  In other words, it can be understood as a constraint or impediment in interest groups’ pursuit of wealth transfer by rent-seeking behavior. Hence, rent-seeking activities are inversely proportional to the transaction costs for obtaining wealth transfer. Macey writes that rent-seeking activities can be discouraged by increasing the transaction cost.  Hence, to put it in an equation –

RS = WT – TC

where,

RS = Net gains by rent-seeking behavior.

WT = Wealth transfer by an interest group legislation.

TC = Transaction Cost.

As a key fourth-branch investigative institution, which deals with cases of corruption and bribery, CBI can play an essential role in increasing the transaction cost. This is because rent-seeking behaviour generally involves illegal activities (such as bribing government officials) for obtaining wealth transfer laws. Such activities, if properly probed and brought to light, can have dire consequences for the government. A case in point would be the aforementioned example of coal mine allocation. What transpired later was that coal mining rights were granted to private players illegally and arbitrarily.  This led to CBI investigations into the matter. However, many high-profile leaders and industrialists were let off the hook because of insufficient evidence against them.  The Supreme Court said that the CBI had changed the “heart of the coal scam report” and directed the government to insulate the agency “from external influence and intrusion.”  If the investigation is properly conducted in such matters without interference from the executive, it will increase the transaction cost.

There are two ways in which giving independence to CBI can increase the transaction cost. Firstly, an independent CBI will effectively conduct investigations without fear or favor in matters involving government officials and political leadership. This will lead to an increase in transparency in governance affairs, and thus, affixes accountability. Furthermore, it can help overcome the problem of information asymmetry to some extent as the voters can make a more informed choice if they have information about the wrongdoings of their political representatives. This will have the effect of deterring those involved in governance from promoting illegal rent-seeking behavior as it has the potential of pushing them out of power in the elections and penalizing them as per the law. Since it acts as an impediment in wealth transfer legislation, it increases the transaction cost. Secondly, if an investigative agency properly conducts a probe into the interest groups’ illegal rent-seeking activities, their gains cannot be ensured. This is particularly because a responsible system of checks and balances will prevent the same. For instance, the Supreme Court struck down all the government’s coal mine allocation after a thorough investigation was carried out in the matter. Hence, it will become risky for them to invest their money as the gains cannot be ensured. Furthermore, they can be punished for the same as per the law in force. Transaction cost is increased by any impediment that comes in the way of wealth-transfer legislation. The uncertainty regarding gains by involvement in rent-seeking activities and the likelihood of conviction act as an impediment in wealth transfer legislation. Hence, they certainly increase the transaction cost of obtaining favorable legislation. Since it is established that – if an independent CBI conducts the unbiased investigation, it will lead to an increased transaction cost, it is not in political leadership’s interest to ensure its autonomy and authority. Maybe this is why the Central government remains hesitant in tabling an Independent Institutions Bill, which could have been a major step towards ensuring the independence of fourth-branch institutions like CBI.

Conclusion

It is clear that political leaderships, in the accountability framework, have time and again tried to control CBI to [A] overcome the system of checks and balances that it offers; and [B] suppress the voice of opposition. This leads to decreased transparency in democratic governance. This decreased transparency helps the government feed its self-interests while furthering the benefits of interest groups through a combination of wealth transfer legislation and subsequent executive actions. Hence, it is in the political leadership’s interest to ensure that CBI does not become independent.

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