Recently the issue of transparency in the financing of political parties has been brought to the limelight in the context of the government’s efforts to curb black money by demonetising currency.  Prime Minister Narendra Modi and the Chief Election Commissioner have expressed the need to examine the funding of political parties and elections.

How political parties are financed is an important indicator of the maturity and quality of a democracy.  The resources used by political parties to fund election campaigns and their ongoing political activities need examination.  Access to political finance, skews the level playing field among parties and electoral candidates, as all candidates or their parties may not have equal access to funds required to fight a successful election campaign.  Competitive politics makes a democracy vibrant and deliberative, but it also places demands on financial resources required to wage effective political battles.  This gets exacerbated with a high periodicity of elections, which is unavoidable in a federal structure as India, which requires state and parliamentary elections.

In India, funds are mobilised by political parties or their candidates to finance elections and other political campaigns.  Under the Representation of People Act, 1951 individuals and companies (other than a government company) are allowed to contribute to political parties.  While there are no limits on the amount of contributions any individual makes to a political party, corporate contributions are regulated.  Companies may donate a maximum of 7.5 percent of the company’s average net profit during the three preceding financial years. Foreign contributions to political parties are prohibited. State funding to political parties in India is limited to indirect tax reliefs and subsidies such as providing tax exemption on the income of political parties, certain amount of free air time on government owned media, office space in Delhi and state capitals for recognised political parties, among others.

While political parties may raise funds from any source, the current disclosure requirements for funds received by them are inadequate and ineffective in building transparency in political financing.  Under the law, political parties are required to file income tax returns and furnish details of the donors who donate more than Rs 20,000 in the given year.  The requirement for disclosures above a certain amount, may lead to practices where parties may split donations across various contributors in order to evade the requirement to disclose donor information.  The financing of political parties continues to be a black box in India as parties are not required to declare the total contributions received by them in the given year.  Neither do they furnish details of the various contributions made to the party which are below the Rs 20,000 limit.

When examining transparency in financing of political parties, not only is it important to discuss the sources of funding but also the utilisation of these funds for a range of political activities, including elections.  Spending limits on election campaigns may be imposed with a view to ensure greater fairness and equality in political competition, but their effectiveness is questionable.  Currently, there are statutory limits on the amount of money that can be spent by a candidate on his election campaign.  Candidates are not allowed to spend more than 28 lakh for state assembly elections and Rs 70 lakh for Lok Sabha elections.

They are required to disclose their election campaign expenses after the conduct of the particular state assembly or Lok Sabha election.  However, several expert bodies such as the Law Commission and Parliamentary Standing Committees have observed that the actual expenditure incurred by candidates in an election is significantly higher than the amount disclosed by them.  To disguise expenditures incurred by the candidate, clever accounting allows for classifying certain election expenses as routine, non-campaign related expenditures and therefore allow candidates to circumvent the statutory limit. Additionally, there is no limit imposed on spending by political parties on election campaigns.  Neither does the expenditure incurred by political parties in bolstering their candidate’s election campaign count towards the spending limit on the particular candidate.  Therefore, the inability to effectively limit or regulate expenditure on elections by political parties and candidates, makes the statutory limits largely irrelevant.

Given such observations, several expert bodies have looked at state funding of elections in order to level the playing field for electoral politics and provide for a more transparent system of financing.  Some have argued that full state funding of elections would have significant budgetary implications, and may not be feasible.  Further tax payer money would be diverted away from developmental and more significant activities to more election-oriented politics. In light of these challenges, it has been argued that the current level of partial state funding should continue.

To strengthen the regulatory mechanism around financing of political parties, some low hanging opportunities could be explored.  For example, public disclosure of the origin and the use of funds by political parties must be made more stringent and robust in order to ensure transparency in political financing. The Law Commission has recommended that audited political party accounts should be published yearly under predetermined account heads, similar to the accounts of public limited companies.

As we have seen, putting financing limits on political parties has not been very effective in bringing about transparency in the election process. Other ways of addressing the issue could be scrutinising the sources of election funds, establishing ceilings for political parties, public disclosure of accounts, and reducing the duration of our election cycles. This would help bring about structural changes that build greater transparency and accountability in political financing.

The author heads the research team at PRS Legislative Research.