Demonetisation alone won't stop black money in political funding; electoral reform needed

One of the many articulated (and oft changing) aims of demonetisation has been to curb the use of black money in poll funding. In an interview to Doordarshan NewsUnion finance minister Arun Jaitley said, "There is only one political repercussion I want to see with this (demonetisation) and that is that politics and the process of elections will also get cleaned… So far in our country, there has been a practice of invisible political funding; that will also have to be visible in a democracy."

This raises two questions:

Fiirst, why is the use of black money so rampant in the Indian electoral system?
Second, can we expect demonetisation have any significant impact on this phenomenon?

The laws that govern the financing of elections in India are the Representation of the People Act, 1951 and Conduct of Elections Rules, 1961. While many amendments have been made to both these acts over the years, presently, the expenditure incurred by a candidate during a political campaign can range between Rs 54 lakh and Rs 70 lakh. However, there exists no cap on the expenditure for propagating the party’s programme during an election.

 Demonetisation alone wont stop black money in political funding; electoral reform needed

Representational image. AFP

There is no direct state funding of elections in India, hence the funds for footing such expenditure can be raised primarily in two ways: (a) Individual contributions (these have no limit on them); (b) corporate contributions (capped at five percent of the company’s average net profits during the three immediately preceding financial years and are also tax exempt). To ensure transparency, each party is required to submit an account of contributions exceeding Rs 20,000 (from an individual or a company) to the Income Tax authority and all candidates have to file an affidavit with the Election Commission, disclosing their assets and liabilities. Such a framework aims to serve the dual purpose of (a) ensuring ‘equality of opportunity’ by reducing the candidates dependence on wealthy donors as not all citizens have access to such avenues and (b) monitoring of disproportionate donors.

However, the inadequacy of the above guidelines in regulating "money power" in the elections is best summed up by former prime minister Atal Bihari Vajpayee — "every legislator starts his career with the lie of the false election return he files". The per candidate campaign expenditure ceilings, instead of limiting costs, only result in evasion through under reporting. This is so because the ceilings don’t reflect the competitive cost of an election as a candidate is likely to spend 50 to 100 times more money than that, if he/she hopes to win. Furthermore, the lack of public financing in conjunction with the limit imposed on corporate donations means that candidates have to raise money on their own for each election.

To make things worse, there exists no limit on party spending. Hence, effectively, there is no upper limit on how much a party can spend on a campaign — as long as party propaganda doesn’t favour any particular candidate, any expenditure so incurred is not counted as part of a candidate’s campaign expenditure. The exploitation of this loophole results in warped scenarios in Indian elections — on one hand, a candidate’s jeep can be stopped for using two loudspeakers instead of one, while on the other hand a national party may sponsor front-page ads on every newspaper on the day of the polls.

Hence, as a result of the prevailing electoral finance laws, the following scenarios have become commonplace in Indian elections:

In one scenario, a party may simply favour 'crorepati candidates' ie rich candidates who are capable of funding their own campaigns, a phenomenon that may result in greater participation of criminals in electoral politics.

An alternate scenario is that of the creation of a powerful nexus between corporates and candidates. Corporates, unable to contribute more than the five percent ceiling, donate to political parties/candidates using undisclosed black money, in exchange for regulatory kickbacks if the candidate in need of these funds is elected to power. Another interesting trend is that corporates (and individuals) display risk-averse behaviour as they are averse to making disclosed donations despite the tax exemption offered. This is so because the anonymity offered by undisclosed donations (made by breaking up a large donation into packages of less than Rs 20,000) protects them from reprisal from a political party to which they are not donating or if they are contributing to two opposing parties simultaneously in order to hedge their bets.

This means that black money runs rampant in elections. In fact, as of May 2014, 93.8 percent of the income reported by the Congress and 91.3 percent of the BJP’s income came from unlisted sources. Furthermore, campaign donations are tax deductible only if they are made to political parties, and not to individual candidates.

Combined with the lack of transparency and accountability in the internal democracy of a party, this means that there exists no guarantee that the political party in question will allocate the contributions to the donors’ preferred candidates.

The political business cycle also shows evidence of the aforementioned nexus. For instance, Devesh Kapur and Milan Vishnav  show a nexus between real estate sector and election funding by showing a strong statistical association between election season and the price of cement. Sandip Sukhtankar, professor at University of Virginia, has found that during election years there exists evidence of embezzlement in politically controlled mills, a fact reflected in lower prices paid to farmers for cane. Several corporate agglomerations that were perceived to be close to Narendra Modi saw a 30 percent increase in their valuation in 2014, on the expectation that Modi would form the coming government.

Cumulatively, these factors have a perverse impact on political equality. Individuals with poorer socio-economic backgrounds or individuals who refuse to indulge in ‘dirty politics’ are priced out of the system, thus hindering an equitable 'right to public office'. Election finance reform needs to be rooted in removing/reducing corruption, reducing campaign costs and ensuring equal opportunity for political participation. Given this context, demonetisation will only affect black money in poll finance to the extent that it affects the current stock of black money. The impact on the current stock also may be limited as (a) given that a cash deposit is taxed only if it exceeds Rs 2.5 lakh, a deposit of Rs two lakh can be broken up into about 12 packages of Rs 20,000, thereby perpetuating the cycle of "invisible political funding" and (b) the newly minted Rs 2,000 notes make it easier to transport black money in a less suspicious fashion.

Changing the prevalent framework requires sustainable reform in election finance. Such reform can be instituted by adopting alternative models of campaign financing such as public financing, grassroot funding or a hybrid of both (for instance public funding of parties in proportion to the amounts they raise openly from identified small-sum private donor). However, any attempt at mobilising grassroot finance in India may be frustrated by the lack complete financial inclusion in the country. John Stuart Mill once said that a political party is most likely to cater to the electorate that forms its votebank. If such a votebank also becomes the primary source of funding for the candidates, perhaps the goal of financial inclusion will be pursued more proactively.

Individuals are likely to give money to a political party if they believe that the concerned party will provide them with commensurate deliverables — this holds true for both grassroots and public finance (a major component of which would be tax revenue). Furthermore, party and campaign finance should be brought under the purview of the RTI to prevent small donations from being used cumulatively by donors to make large donations. Thus, both systems have potential for increasing accountability and therefore controlling the magnitude of campaign expenditure and the amount of black money flowing through the system.

monk prayogshala

The 2016 US presidential election saw the candidates use campaign funding as a rallying point. However, campaign finance is an issue that is seldom raised by political parties in India. Perhaps the renewed focus on black money due to demonetisation will help bringing this issue into popular political discourse.

The author is senior research assistant at the Department of Economics at Monk Prayogshala, a not-for-profit academic research institute based in Mumbai.

Updated Date: Dec 28, 2016 15:38:26 IST