Needed: Solutions for political finance

As the apex court has ruled, the electoral bond scheme was not appropriate

With the Election Commission of India (ECI) announcing the poll schedule for the 18th Lok Sabha, the nation is gearing up to participate in the world’s largest democratic exercise by far. Amidst the focus on the upcoming elections over the coming weeks, two significant recent developments have provided citizens with ample food for thought about improving the country’s electoral and political process. The first is the Ram Nath Kovind committee report, which studied the feasibility of simultaneous elections. The second significant, and certainly more consequential, development is the Supreme Court judgment on the electoral bond issue.

The Kovind committee has unanimously supported the idea of simultaneous elections and given a road map for moving forward in this direction. One of the driving reasons for simultaneous elections is to reduce policy and governance uncertainty. Political parties are often led by the compulsions of the next state election. The technical work presented in the report showed simultaneous elections can improve outcomes in areas such as growth, inflation, and public expenditure. Although there is merit in the idea of simultaneous elections in principle, attaining it will be difficult. Thus, if the next government wishes to take the suggestions forward, it would be well advised not to rush the process.

However, the more urgent issue that needs to be addressed is the state of election/political finance in the country. A Constitution Bench of the Supreme Court has declared the electoral bond scheme unconstitutional. The court rejected the secrecy built into the scheme and found no justification to restrict citizens’ right to information under Article 19(1)(a) of the Constitution, which can only be restricted under conditions stipulated in Article 19(2).

The State Bank of India, which was authorised to issue electoral bonds, has submitted information on donors and beneficiary parties under the court’s direction. While it’s certainly of interest to know who donated to whom, the bigger issue is that India needs a better system of political funding. As the apex court has ruled, the electoral bond scheme was not a solution.

A 2014 study pointed out that over Rs 1.5 trillion was spent on elections in the previous five years, with about half of it coming from unaccounted sources. It is reasonable to assume that expenses would have easily doubled by now. The money is obviously raised from the system and has implications for policy and governance. The use of large sums of money also has other long-term problems. For instance, it increases entry barriers. Large entry barriers tend to lead to suboptimal outcomes, both in the marketplace and politics.

The electoral finance problem can be divided into two parts — collection and spending. In terms of spending, while there are restrictions on candidates in elections, there are no restrictions on political parties, which must be addressed. Anecdotal evidence suggests spending limits for candidates are not properly enforced, perhaps because of a lack of state capacity for proper monitoring. It is absolutely necessary that limits are strictly enforced and violators are quickly reprimanded. The ECI can design a mechanism to hire temporary staff or engage with organisations working in the social sector for this purpose. Addressing the problem on the demand side effectively, which is electoral expenditure in this case, can automatically address the supply-side issue, or the need for raising large sums, to some extent.

In terms of collection reforms, the starting point should be to ensure every rupee is accounted for. Since India is a world leader in payment solutions, the option of cash donation can easily be done away with. State funding of elections is often suggested as a way out and has indeed been adopted by various countries in different forms. However, it is unlikely to help if relevant institutional mechanisms are not in place. Without proper safeguards, political parties may just add their resources to state funds. Some commentators have suggested funding of political parties and not elections.

Another option could be to set up an independently managed national fund where anyone — individuals or firms — can contribute and claim income tax benefits. The proceeds of the fund can be distributed based on a predetermined formula among political parties on the condition of regular audits by professional auditors. The formula can consider factors such as geographical reach and votes garnered in a specified number of previous elections. This would address the fear of donor retribution, if any, because they will be donating to a national fund and have no control over distribution. Further, this mechanism will address the risk of policy capture by corporations because donations will be distributed among several political parties based on a predetermined formula. Such a mechanism would also provide donors with a sense of satisfaction for contributing to the political and democratic process. Nonetheless, since a democratic system should protect freedom of choice, individuals and firms can also be allowed to directly contribute to political parties. However, all such transactions should be disclosed, say, quarterly by the political parties.

A mechanism like this may not solve all the problems, but will definitely correct the funding imbalance and bring transparency. Since the issue is of paramount importance, the next government could set up a panel to comprehensively examine the matter, study best practices from around the world, and suggest solutions. Such a report would be a good starting point for a healthy public debate and subsequent policy action.