A staggering Rs 55,000–60,000 crore was spent in the Lok Sabha elections, 2019, according to a study by the Centre for Media Studies (CMS), a not-for-profit multidisciplinary development research think-tank. The figure is almost twice the amount estimated by the CMS for the last general polls in 2014 at Rs 30,000. As of now, corporate donations, which come in various forms, mainly through individual corporate/businesses contributions and electoral trusts, cover more than the two-third of total funds collected by the political parties. This will further increase in the years to come, with the recent changes in the laws and the introduction of new tools such as electoral bonds.
History
The history of funding of political parties in India goes back to the freedom movement. The Birlas were one of the leading donors of the Indian National Congress. After Independence, the business class as a whole secured some leverage over the shaping of the Congress government’s economic policy. It contributed the majority of donations towards poll spending in the post-independence era. In the 1960s, the Congress and the Swatantra Party were the main beneficiaries of donations from big conglomerates such as the Tatas and the Birlas, who together accounted for 34 per cent of the total company contributions between 1962 and 1968.
In 1969, the Indira Gandhi government imposed a complete ban on corporate funding (via deletion of the Section 293A of the Companies Act) to break the nexus between politics and businesses. However, this proved counterproductive. To beat the ban, political parties started raising funds by publishing souvenirs, in which advertisements were placed by the business houses. Businesses also resorted to tax evasions, black-market operations and other illegal mechanisms due to political compulsions and the threat of selective raids and nationalisation. This period also saw the rise of “briefcase politics” through which vast amounts of black money was transferred into the Congress Party account. In the era of license permit raj, this arrangement also suited the businesses. However, a forward-looking Rajiv Gandhi government, intending to end the culture of license permit raj, took a crucial decision of lifting the ban in 1985.
Post-liberalisation, real estate and manufacturing have been the two big sources for political funding. This is possibly because land is a core element in both sectors. Due to the regulatory restrictions on land, politicians wield enormous discretionary power over business activity in these areas. Politicians help builders negotiate the complex network of regulatory permissions dealing with land in exchange for cash infusions around election time. An analysis of the liabilities declared by MPs elected in the 2014 Lok Sabha election reveals how many of them raised huge loans from many big and small real estate companies.
Recent Changes
The Central Government has introduced three major changes since in the mechanics of political funding in India-political parties can now receive foreign funds; any company can donate any amount of money to any political party; and any individual, group of people or company can donate money anonymously to any party through electoral bonds. The removal of a cap on corporate donations and introduction of electoral bonds have further strengthened corporate influence in political decision making. Among the known sources of donations to parties, between 2012 and 2016, corporate contributions formed a staggering 89 per cent of the total funds.
The 2017 Finance Act lifted the cap on corporate contributions from 7.5 per cent of the net profit of a company’s past three financial years and removed the obligation to report such contributions in the company’s profit and loss account. Besides, such donations do not require the approval of a company’s board of directors. This provision is a convenient loophole for unscrupulous elements to route black money through bogus companies.
Introduced in 2013, electoral trusts was the government’s way of creating a layer of opacity in the process of corporate donations to parties. These trusts could receive contributions from various companies and disburse them to various parties, with the public not knowing which company was really donating funds to which party or any quid pro quo transactions. In 2017–18, 86 per cent of the contributions to the 22 registered electoral trusts went to the ruling party. Between 2013 and 2016, donations from trusts accounted for one-third of all funding that parties disclosed
Electoral Bonds
In May 2017 the EC wrote to the Union Ministry of Law and Justice expressing apprehensions that electoral bonds might lead to increased use of black money for political funding through shell companies. The commission wanted the rollback of electoral bonds. The Commission called the introduction of electoral bonds a retrograde step in its submission to a parliamentary panel. The Electoral Bonds were originally meant for the Lok Sabha elections but it was later on extended to the state assembly elections.
On January 30, the RBI responded with objections to an amendment to the Reserve Bank of India Act (required to introduce the bonds). RBI called the electoral bonds a type of bearer bond that would not lead to transparency. Instead the purchasers of the bonds would remain secret.
The central government had on January 29, 2018, notified the electoral bond scheme. It is like a promissory note that can be bought by any Indian citizen or company incorporated in India from select branches of State Bank of India. The citizen can then donate the same to any eligible political party of his/her choice. Money received from electoral bonds will be deposited in a bank account verified by the Election Commission. All the transactions for electoral bonds can be done only through that account. These cannot be bought with cash, and the buyer must submit know your customer (KYC) details to the bank. Parties can encash these bonds in their designated SBI accounts.
The donor does not need to disclose which party he has donated to and the party does not need to reveal from whom it got the bonds. This code of secrecy ensures that only the ruling party has access to the information about which individual or company has donated to which party. This will result in people donating only to the ruling party. Electoral bonds militate against a fundamental premise: that the citizens have a right to know who is funding whom, and, thereby, possibly influencing policy outcomes.
First, the lack of anonymity creates a bias in favour of the ruling party. If a big corporate company does not donate to the ruling party, it could be punished later if the party is returned to power. The bulk of the donations, therefore, goes to the ruling party, thereby enhancing its chances of returning to power. Although perfectly legal, electoral bonds are heavily biased. Second, bonds cannot prevent the practice of cash donations. These transactions remain off the record books and leave no audit trail. Citizens will never know the amounts, their distribution across parties, and the names of donors. Third, bonds cannot prevent foreign agencies from financing Indian elections and looking for favours from the new government. This can easily be done through the creation of shell companies and making donations appear legitimate. The overwhelming number of electoral bonds sold was of very high denominations. The donors, in all probability, were corporates and businesses that wished to remain on the right side of the government.
Public Funding Of Elections
Direct state funding of political parties is practised in 86 per cent of the European countries, 71 per cent in Africa, 63 per cent in the Americas and 58 per cent in Asia Its supporters say that public finance can help protect the political process from direct, quid pro quo kickbacks or corruption and create a level playing field for parties, candidates with less resources and new entrants. There is, however, no guarantee that public finance will reduce election expenditure. In countries like Italy, Israel and Finland, which have experimented with public finding, there has been no significant drop in expenses. In the US, election expenditure continues to soar. Only a handful of countries like Germany and Japan have been able to reduce their poll expenditure by any significant extent. Besides, despite public finance, the reliance on private donations has not decreased in countries such as the US and Israel.
The success stories of Canada, Sweden and, to some extent, Japan, tell that an effective public funding model has two elements: reducing the dependency on corporate or private money by strict restrictions on expenditure limits, strong regulations and disclosures, and infusing white money through state funding or incentivising other funding options, such as tax-free donation.
Way Forward
The Election Commission has sent a long list of suggestions for electoral reforms to the Union Government. Among these reforms was the proposal to reintroduce the provision in the Companies Act, 2013, which allowed a company to donate a maximum of 7.5 per cent of its average three-year net profit as political donations through electoral bonds. The government had done away with this restriction after the electoral bond scheme was introduced in 2017, leading to concerns that shell companies could be set up for the sole purpose of political donations. The commission is of the view that the earlier provisions ensured that only profit making companies with a proven track record provide donations to political parties and accordingly, it is recommended that this provision may be reintroduced. This is not the first time the EC has written to a central government on the issue. Like in the past, the government has taken little action on the suggestions related to electoral funding, except in limiting cash donations to Rs 2,000. India’s political finance reform has been stymied by two major factors: a lack of political will for reform, and an economy in which the state exerts a heavy hand, thus incentivising illicit funding.
The roots of the proliferation of unaccounted money in elections can be traced to the structure of political funding, which allows parties to manipulate their accounts any way they want. According to Association of Democratic Reforms (ADR), the six national parties declared an income of Rs 1,559 crore in 2016–17, of which Rs 711 crore, or 46 per cent, came in donations from unknown sources, such as sale of coupon, relief fund, miscellaneous income, voluntary contributions, and contribution from meetings. Full transparency should be paired with better enforcement, independent audits of the accounts of political parties and a zero tolerance policy towards those who lie or manipulate their official campaign expenditure statements. Political parties must come within the ambit of the Right to Information Act (RTI) as it will make the working of the political parties more transparent in terms of election funding