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Reuters/Anindito Mukherjee
Time for the real debate?
MYSTERIOUS MONEY

The dirty secret of Indian politics that neither the AAP nor the BJP are debating

Arjun Sinha
By Arjun Sinha

The mysterious Rs2 crore ($323,000) that the Aam Aadmi Party (AAP) received in donations last year has triggered a frenzied search for answers.

Where did this money come from and how could a party founded on principles of economic transparency accept this cash?

For now, the issue has become a game of news cycles. The Bharatiya Janata Party (BJP) and the Congress are trying their best to ensure that the focus stays on the money trail for as long as possible. Meanwhile, the AAP has attempted to distance itself from the recipients and wants to deflect the argument to a case of the pot calling the kettle black.

In the heat of the Delhi elections, no one is debating the dirty secret of Indian elections: Political funding—or to be more specific, disclosure of interest.

Till now the relationship between money and politics has been similar to that between an alcoholic and his bottle. Public in denial but impossible to live without. The fantastic amounts of money required to fight a competitive campaign make it important for everyone to know where the money is coming from.

Timeline of attempts

Historically, parties were financed by contributions from friends, family and supporters or philanthropic grants. While corporate donations were legal, The Representation of the People’s Act (pdf) in 1951 created limits on how much could be spent by a candidate.

 In 1985, the Companies Act once again allowed corporates to fund political parties

It was only in 1968 that corporate donations to political parties were banned. While the official response explained that it was to prevent black money in politics and from corporate funding subverting common interests, the popular view has been that the move was to block the rise of C Rajagopalachari’s Swatantra Party and its right-wing economic agenda.

To promote transparency in funding, in 1979, political parties were permitted to claim exemptions from income and wealth taxes, as long as they filed returns listing donations of Rs10,000 and above, along with disclosing the identity of the donors. But tax exemption was not a significant enough incentive to disclose funding.

In 1985, the Companies Act once again allowed corporates to fund political parties, subject to disclosure in accounts and donation not exceeding 5% of the average net profit for the last five years. To bolster disclosure of donations, corporate funders were given income tax exemptions.

Vicious cycle

The Bahujan Samaj Party has never had any funding above Rs20,000

However, there is a greater interest in maintaining funding anonymity rather than taking advantage of tax exemptions. In a fragmented political landscape, entities may not want to be associated with any one party. Moreover, the sources of funds are often illegitimate.

This has created a vicious cycle of political funding: Funding received through numerous small value donations—or in some cases, the funds being provided to numerous associated entities that remain off the books of the political parties.

For example, the Bahujan Samaj Party has never had any funding above Rs20,000. Nearly 90% of the Congress’ income and 75% of the BJP are through donations below the disclosure limit—and therefore not accounted for.

And some industries, especially construction, have shown a high correlation to electoral periods. A 2011 study of cement usage in India showed that “cement consumption does exhibit a political business cycle,” corroborating the quid pro quo relationship between the industry and politicians.

Public funding

Election campaigns in India are expensive, not merely because of the country’s size and population but also since the economic stakes are high. In the 2014 general elections, Indian politicians spent an estimated $5 billion on their campaigns, second only to their US counterparts.

 In the US, expenses above a very low threshold need to be itemised and disclosed.

And since they provide this critical financial firepower, donors also expect to have a significant voice in policy decisions once the government is in power.

One solution is to wish away political funding and replace it by state funding (or in fact, tax payer funding). This can be direct, through cash or indirect, via airtime on television and radio. But a complete state funding route has its own problems. Parties in power would have a distinct advantage to corner assets. An equal distribution of resources may not necessarily reflect the will of the people, with the more popular parties being forced to receive the same amount as a far unpopular organisation.

American model

The other is by creating greater transparency and creating caps on donations (rather than disclosure limits). This allows citizens to know who holds the reins to their legislators and additionally requires parties and candidates to find a large donor base—rather than be vested to a few large entities.

In the US, for example, expenses above a very low threshold ($20 in the state of Colorado) need to be itemised and disclosed. This is coupled with low contribution limits of $2,600 for individuals, $5,000 for the national political committee, and between $2,500 and $5,000 for political action committees (PACs) (of course, the US also has super PACs that can spend an unlimited amount without being associated to the campaign).

European mix

Some European nations have tried a mix of the two approaches.

In Germany, small donations are given tax deductions, a benefit that is not extended to corporate donations. All expenses, expenditures, income, assets of the party (and its party units) are required to be disclosed. Any entity that funds more than 10,000 euros in a year is required to be disclosed. Any limitations in raising finance is supported by public funding. A pool (which currently is set at 133 million euros) is distributed between parties.

Only those who poll more than 0.5% of the vote nationally are eligible.

The distribution is on the basis of the latest election results (with the party receiving between 0.70 to 0.85 euro for each vote received) and a matching system (in which for every euro donated, the state gives 0.38 euros). Moreover, there is a cap that the amount distributed cannot exceed the party’s annual income.

This has resulted in German politics being funded by a healthy mix of government funding (30%), memberships (28%), individuals (10%), elected officials (12%) and corporate funding (surprisingly only 3.5%), with the remaining being investments and other commercial sources.

Urgent overhaul

Whatever the route, it is clear that the current laws in India leave much to be required.

Our polity now needs to realise the true cost of campaigning in India.

But any campaign finance reform without internal reflection is either piecemeal—or in some cases, simply reversed by legislative amendment.

What is needed is a significant overhaul of the donation and disclosure system. This includes blocking loopholes in uncapped party spending, more stringent disclosure norms on party and candidate funding, and widening the net for associated entity expenditures to be recognised as a part of the campaign’s finance.

Simultaneously, our polity now needs to realise the true cost of campaigning in India. And as a result, either raise the limits imposed on state and central elections to realistic levels—or alternatively, consider removing caps on expenditure with better reporting and funding norms in place.

Till then, these electoral histrionics of mysterious funds will continue to play out on newspaper frontpages and television sets without anyone being held accountable.

We welcome your comments at ideas.india@qz.com.