Expert Speak India Matters
Published on Nov 14, 2022
The legal lacunae in regulating political parties and election finance need to be plugged
Regulating political parties and opaque election finance

Elections are to democracy what financial markets are to the economy. Elections channel the flow of political power, from the people to the government via political parties, which act like asset management companies in financial markets, enhancing market contestability and assuring stability. The absence of an omnibus law to regulate elections and political parties in India is a legislative gap waiting to be filled.

Regulations for political parties in India

The generic legislation on elections—Representation of the People Act 1951—was amended in 1988 to add a new section IVA on “Registration of political parties” setting out a barebones template for the Election Commission of India (ECI) to exercise its generic mandate for superintendence, direction, and control of elections under Article 324 of the Constitution of India.

Any association of citizens can apply to the ECI to be registered by submitting its Memorandum of Association and swearing allegiance to the Constitution. The subsequent process of “recognition” is tougher. It requires fulfilment of performance criteria, including a minimum share of the electoral votes cast in the last election and the number of seats won to become a recognised national or a state party. Not surprisingly, there are only seven recognised national parties and 54 state parties versus 2,259 Registered Unrecognised Political Parties (RUPP) after ECI initiated action against 537 others for defaulting on compliance regulations.

Registration exempts donations received from income tax on the precondition that the party contests elections within five years of registration and submits an annual statement of contributions and audited annual accounts within six months of the fiscal year-end.

A regulatory gap: Municipal political parties

Municipalities became the third level of government, three decades ago in 1992, through the 74th constitutional amendment. But a parallel recognition for political parties operating only at the municipal level is yet to be conceptualised. India has 343 cities with large populations (2011); of these, there are 13 cities with 2 million plus population, 33 with 1 million plus, 43 with half a million plus, and 253 cities with 100,000 plus population.

The combined urban population of 377 million in India is larger than all other countries, except China, including the United States– the third largest country—and yet no specific regulations exist for political parties representing municipal concerns.

Public funding of elections

Unlike the practice in around 14 states of the US, the Indian government does not directly fund election campaigns of parties or independents. However, it has made political parties exempt from income tax, to encourage private corporate and individual investment in building political parties. The diversity and number of political parties show that this approach has paid off.

Private, particularly corporate funding, of election campaigns, comes with the inevitable apprehension of blurred lines, which should glow bright red between private and public interest, especially once political parties form the government.The straightforward alternative would be for the government to pay each election candidate a predetermined amount for reasonable election expenses. To discourage free-riding on public funds, candidates could be required to self-generate a minimum level from the public, to demonstrate their public support, before government funding, usually, a matching amount up to a limit, can be accessed. The problem in India remains fiscally strapped public budgets and alternative investment priorities.

Private, particularly corporate funding, of election campaigns, comes with the inevitable apprehension of blurred lines, which should glow bright red between private and public interest, especially once political parties form the government.

The ECI set upper-end limits (January 2022) for election campaign expenditure in parliamentary seats at INR9.5 million and INR4 million in state legislature seats. The average voter size in parliamentary seats is 1.7 million ranging from a low of just 55,000 voters in Lakshadweep to a high of over 2 million in Delhi.

A public election grant on the “equal sharing of expenses basis” at 50 percent of the ECI spending limit of INR9.5 million per candidate, would entail an expenditure of INR38.3 billion for the 8,054 candidates who contested the 542 Lok Sabha seats in 2019. This amounts to 14X of the annual budget of INR2.6 billion of the ECI in 2020.

Handing out INR4.8 million to every candidate in a parliamentary election could perversely incentivise a steep growth in the number of candidates, making this a lucrative, if unproductive, quinquennial cottage industry. Consider that an average Indian earns just INR 0.15 million per year or one-sixth of this amount over five years and jobs are in short supply.

Electoral bonds to end large cash payments in election finance

Following the “demonetisation” of high-value notes in 2016-17 targeting the entrenched system of corruption, including elections financed by unaccounted cash, the then Finance Minister, late Arun Jaitley, floated a scheme of “Electoral Bonds” for fiscal 2017-18. These are physical “promissory notes” purchasable only through a banking transaction (not against cash) by those intending to donate to any registered political party, which got at least 1 percent of the vote share in the previous election. The State Bank of India—a publicly owned commercial bank, with the largest network of branches is the only designated vendor. Bonds remain valid for 15 days within which they can be encashed through the bank account of the selected political party. The purchaser-donor enjoys tax credits on the purchased bonds as in any other donation to charities.

The idea was to facilitate large donors, preferring anonymity whilst donating funds for elections, with an alternative to cash payments. The Finance Minister’s intuition seemed well founded. According to an Association of Democratic Reforms (ADR) report (July 2022), donors welcomed the anonymity. As expected, the ruling party—the Bhartiya Janta Party (BJP) benefited the most, receiving INR2.1 billion, or 95 percent of the bonds purchased in 2017-18. The inflow increased to INR14.5 billion in 2018-19 and further to INR25.6 billion in 2019-20.

The fact that the BJP was the biggest gainer does not per se invalidate the public purpose of the instrument, which was to end the use of unaccounted cash in electoral finance. Corporate donations concentrated in the ruling party do raise red flags of potentially unseemly regulatory capture. But the switch from cash financing to using banked funds is welcome.

Not very private

The anonymity afforded by the bonds is primarily versus citizens. SBI is a government-owned bank, which can be persuaded by the government into sharing data informally regarding the bond purchases and encashments by political parties- data that SBI possesses but refused to divulge to ADR. This asymmetry in access to information should be corrected by protecting information privacy better.

Broad basing the vending of these bonds to all banks can make it difficult to informally aggregate privileged information. Bonds should be digitised and the privacy of the transfer should be protected through encryption. Since redemption is through banking channels, the audit trail of the donor and the recipient would exist for authorised access. Transparency should be enhanced whilst protecting anonymity by authorising ECI to collect and publish de-personalised information. Access for security and criminal investigation agencies to the personal data should come via a specific order of the ECI allowing such privileged access.

Strengthen supervision of political parties

Poor intra-party governance is concentrated in the Registered Unrecognised Political Parties (RUPP). Most are in breach of their undertaking to fight an election within five years and remain active thereafter. Only 623 contested elections in 2019 while 2,056 RUPPs failed to file their Annual Audited Accounts. Per ECI data, 199 RUPPs claimed INR4.5 billion in Income Tax exemptions in 2018-19. This increased to 219 RUPPs claiming exemption on INR6.1 billion in 2019-20. Out of these, 66 RUPPs claimed income tax exemption without even submitting their annual contribution report.

Income tax benefits to follow regulatory compliance

There is a need to strengthen the regulatory arrangement for political parties and reduce the limit for anonymous physical donations from the INR20,000 ($250) prevailing today, to INR 2,000. The benefit of income tax exemption should only be available after registered parties demonstrate a five-year record of compliance with the regulations. A breach of compliance should be penalised heavily, including by suspension of the income tax-exempt status of defaulting entities.

Enforce inner-party democracy

Specify minimum metrics for ensuring inner-party democracy and good governance, including compulsory periodic elections, and making party members occupying party positions, ineligible for holding executive positions in government. This is necessary to create a complete segregation of functions within the ruling party and the government.

Empower ECI to regulate political parties

The misuse of the fiscal privileges afforded to political parties can be minimised through targeted regulatory tweaks, within the existing construct of private financing and the inner functioning of parties improved through targeted regulation.

Amend the Representation of Peoples Act 1952 to mandate the ECI–a constitutional entity—as the regulator of political parties. Simultaneously, broadband, beyond the government, the institutional arrangements for appointments to and supervision over the ECI. Collective supervision via a special purpose, an all-party committee of Parliament would be a welcome innovation.

At India’s stage of development, public funding of elections is an unaffordable luxury. Nevertheless, the misuse of the fiscal privileges afforded to political parties can be minimised through targeted regulatory tweaks, within the existing construct of private financing and the inner functioning of parties improved through targeted regulation. The question remains does the political will to regulate political parties exist?

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Sanjeev Ahluwalia

Sanjeev Ahluwalia

Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...

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