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Insights into Editorial: A vote for state funding

Insights into Editorial: A vote for state funding



Indian elections are the world’s biggest exercise in democracy but also among the most expensive. India’s campaign spend is only matched by the American presidential race, the world’s most expensive election.

Unreported cash continues to make its way into the reserves of political parties and individual candidates. There is very little transparency in who gives and receives corporate contributions.

Political parties often sidestep any independent audit of their accounts, leaving the public uninformed.

The system of electoral bonds for making political contributions to political parties is nowhere near the system of transparent political funding that is needed. 

Chief election commissioner recently said, Electoral bonds will not solve all problems pertaining to transparency in political funding, but hoped that it will be a step in the “right direction”.

Why were Electoral bonds issued by government?

India is the largest democracy in the world.  However, despite strengthening various institutions for the last seven decades, India has not been able to evolve a transparent political funding system.  Elections and political parties are a fundamental feature of Parliamentary democracy.  Elections cost money.  Yet there has not been a transparent funding mechanism of the political system. 

The conventional system of political funding is to rely on donations.  These donations come from a range of sources from political workers, sympathisers, small business people and even large industrialists.  The conventional practice of funding the political system was to take donations in cash and undertake these expenditures in cash.  The sources are anonymous or pseudonymous. 

Earlier the Income Tax Act was amended to include a provision that donations made to political parties would be treated as expenditure and would thus give a tax advantage to the donor. 

It was hoped that donors would increasingly start donating money by cheque.  Some donors did start following this practise but most of them were reluctant to disclose the details of the quantum of donation given to a political party.  This was because they feared consequences visiting them from political opponents. 

The law was further amended to provide for “pass through” electoral trust so that the donors would park their money with the electoral trusts which in turn would distribute the same to various political parties. 

Both these reforms taken together resulted in only a small fraction of the donations coming in form of cheques. 

Last year, Electoral bonds, which were introduced by the government to make funding to political parties transparent, will allow a political donor to purchase bonds from authorised banks and can be redeemed by parties only through registered accounts in a prescribed time frame.

What is Electoral Bond?

An electoral bond is designed to be a bearer instrument like a Promissory Note — in effect, it will be similar to a bank note that is payable to the bearer on demand and free of interest. It can be purchased by any citizen of India or a body incorporated in India.

How do we use it?

  • The bonds will be issued in multiples of ₹1,000, ₹10,000, ₹1 lakh, ₹10 lakh and ₹1 crore and will be available at specified branches of State Bank of India.
  • They can be bought by the donor with a KYC-compliant account.
  • Donors can donate the bonds to their party of choice which can then be cashed in via the party’s verified account within 15 days.
  • Every political party in its returns will have to disclose the amount of donations it has received through electoral bonds to the Election Commission.  The entire transactions would be through banking instruments.

What are the other conditions?

  • Every party that is registered under section 29A of the Representation of the Peoples Act, 1951 and has secured at least one per cent of the votes polled in the most recent Lok Sabha or State electionwill be allotted a verified account by the Election Commission of India.
  • Electoral bond transactions can be made only via this account.
  • The bonds will be available for purchase for a period of 10 days each in the beginning of every quarter, i.e. in January, April, July and October as specified by the Central Government.
  • An additional period of 30 days shall be specified by the Central Government in the year of Lok Sabha elections.
  • The electoral bonds will not bear the name of the donor. In essence, the donor and the party details will be available with the bank, but the political party might not be aware of who the donor is.
  • The intention is to ensure that all the donations made to a party will be accounted for in the balance sheets without exposing the donor details to the public.

Will it be tax deductible?

  • The maximum amount of cash donation that a political party can receive is capped at ₹2,000 (from ₹20,000) and that parties be entitled to receive donations by cheque or digital mode, in addition to electoral bonds.
  • A donor will get a deduction and the recipient, or the political party, will get tax exemption, provided returns are filed by the political party.

What are the shortfalls of Electoral bonds raised by the critics?

  1. Lack of Transparency:

The scheme defeats the purpose for which it was envisaged. The name of the donor will not be revealed either to the party or to the public. So, the problem to replace anonymous donations and bring about transparency and accountability towards voters will remain the same. This would lead to further opacity in the funding process and further limit oversight and accountability.

  1. Generation of Black money

Opacity will lead to generation of more and more black money into the political system.

  1. Politico corporate nexus

Government removal of cap on donations of money to political parties by corporations and the current rule of maintaining anonymity of the donor will further increase the corporate and politicians nexus to work towards the fulfilment of their own selfish aims. It will hamper democracy and making it less answerable to the individual voter and more responsive to deep-pocket special interest groups.

  1. Given that the State Bank of India is owned by the Union government, this raises the spectre that data on donors could be made available to the ruling party to be used to its benefit.

Due to these shortfalls, electoral bonds cannot address the problems that arise from the corporate control over politics and corporate capture of government policies and decisions. Electoral bonds may result in unlimited and undeclared funds going to certain political parties which will be shielded from public scrutiny as the balance sheets will not show which party has been the beneficiary of this money.

What are the other things that will end up strengthening the business-politics nexus?

  1. Lifting of the maximum limit of 7.5% on the proportion of the profits a company can donate to a political party, thus opening up the possibility of shell companies being set up specifically to fund parties;
  2. Amendment of the Foreign Contribution (Regulation) Act (FCRA) opening the floodgates of foreign funding to political parties, especially those which have a foreign support base;
  • The refusal of political parties to come under the RTI Act in order to conceal their sources of funding.

These three things will end up strengthening the business-politics nexus. It goes against the position taken by various electoral reform committees that the existing pattern of political funding encourages lobbying and capture of the government by big donors.

Far from making the funding process transparent, the bond scheme could provide a backdoor to corporates and other lobbies for shaping public policy to benefit their interests.

All registered parties were required to disclose to the EC the identity of individuals and private entities donating more than ₹20,000 every year.

Proposed amendments to the Income Tax Act and the Reserve Bank of India (RBI) Act will exempt parties from keeping records of donations made through bonds.

However, the decision to reduce cash contributions from ₹20,000 to ₹2,000 is a step in the right direction, but the net effect is debatable, since it could prompt parties to take smaller cash donations, and therefore not declare their source.

Way forward

Elections that work well are essential for democracy; conversely, money power can corrode the entire process. A major concern associated with the high cost of elections is that it prevents political parties and candidates with modest financial resources from being competitive in elections.

A number of government committees have outlined reform proposals to contain the negative effects of the high cost of elections. These include strong disclosure norms, strict statutory limits on election expenses and ceiling on corporate donations to political parties.

The rules to limit and restrict the campaign expenditure of parties are largely inoperative because it is easy to circumvent them.

India’s privately funded election campaign stands in contrast to the trend in most countries, which have partial or full public funding or transparent regulation and financial accountability of political finance as in the U.S.

State funding of elections is a potential solution to this problem. The Indrajit Gupta Committee on State Funding of Elections had endorsed partial state funding of recognised political parties and their candidates in elections way back in 1998, but the lack of political will has prevented any serious discussion on this.

The mechanics of this process need to be carefully worked out to establish the allocation of money to national parties, State parties and independent candidates, and to check candidate’s own expenditure over and above that which is provided by the state.