Common Cause and Lokniti Programme of the Centre for the Study of Developing Societies (CSDS), launched India’s first Status of Policing in India Report (SPIR 2018) at the India Habitat Centre on May 9.

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Political Parties And Public Funding

Ensuring a Cleaner Polity

                                                                                 M. V. Rajeev Gowda and Varun Santhosh*

Efforts to reform and improve India's electoral processes must build on some central axioms. Healthy democracies require vibrant political parties and competitive election campaigns. Parties and campaigns need to be able to raise their required resources in a transparent manner. Ideally, these resources should be from diverse sources, i.e., parties should not depend mainly on corporate contributions. Elections must be conducted on a level playing field across parties.

In this article, we argue that public funding of elections and parties is urgently required to enable Indian democracy to achieve the above objectives. We discuss the legitimate costs of democracy, how existing and new electoral laws are counterproductive, and justify the need for public funding before laying out our proposal.

The Legitimate Costs of Democracy

Political parties are mediating institutions that provide platforms for citizens to come together to achieve their desired policy goals. Democratic contestation enables parties to translate voters' preferences into policy. Parties help build social capital and contribute to nation building, as articulated by Emile Durkheim in 1893: “A nation can be maintained only if, between the state and the individual, there is interposed a whole series of secondary groups near enough to the individuals to attract them strongly in their sphere of action and drag them, in this way, into the general torrent of social life.”

Measures to reform India's political process must recognise the importance of political parties and their need for funds for legitimate political activities. In addition to contesting elections, parties need to spend on office establishment, full-time workers, meetings, agitations, publicity and travel. As politics and policy become more complex, parties need to invest in development and training, research, policy planning and systematic engagement with the media and social media. The ability and willingness of parties to raise funds honestly and openly from legitimate sources to sustain political activities is one of the most crucial contemporary concerns of Indian politics.

Escalating Election Expenditures

During the 2014 Lok Sabha polls, the scale of overall election-related expenditures by political parties was estimated by the Centre for Media Studies to be about 220 to 230 billion. High levels of expenditur ` ` e on elections are enabled by the fact that India's election laws impose no ceilings on campaign-related spending by parties. Election expenditures have escalated partly because of the increase in the number of public rallies and the amount spent on media.

Print, broadcast, out-of-home advertising, and social media are all increasingly used for political messaging and advertising. Media coverage of political campaigns has a multiplier effect and commentators have pointed out its disproportionate influence in shaping election outcomes. The costs of advertising have risen steeply across all forms of media, thereby favouring those with money power. Further, governments expend significant resources on advertising and branding campaigns and expect to reap the benefits on polling day.

India has also given birth to a phenomenon called “paid news” where parties and candidates pay media outlets for positive stories and opinion polls, disguising them as editorial content instead of declaring them to be advertorials. The Election Commission (EC) has asked the government to amend the Representation of People Act (RPA) to make paid news an offence because no law currently deals with this devious practice.

Previous efforts at reforming India's election expenditure framework had attempted to address mediarelated expenses by providing in-kind subsidies. Parties were allocated brief free airtime on the public broadcasters, Doordarshan (television) and All India Radio. The amendment to the RPA, enacted in 2003 extended this to even private media. Private broadcasters were to “allocate equitable sharing of time on the cable television network and other electronic media in such manner as may be prescribed to display or propagate any election matter or to address public in connection with an election.” However, the rules for the law are yet to be framed and the effort to extend publicly subsidised airtime to private media has faced significant resistance. It is also difficult to implement in India's highly diverse and fragmented media market.

Election Expenditure Regulations in Practice

In contrast to parties, individual candidates can currently spend a maximum of 7 million per parliam ` entary constituency, which typically has an average of 1.4 million voters (i.e., about 5 per voter). If ca ` ndidates report, or can be proved to have spent more than this limit, they can be disqualified and lose their seats. This rarely happens in practice. Anecdotal data, media reports and studies point towards massive expenditures, an order of magnitude above the prescribed limit. Further, analysis by Association for Democratic Reforms (ADR) shows that candidates disclose only a fraction of their total expenditures.

Former Chief Election Commissioner S.Y. Quraishi catalogues 40 “types of illegal expenses undertaken during election,” including vote-buying, and adds that, “every year more ingenious methods of distributing cash come to light.” Incidentally, the late Union Minister Gopinath Munde declared in a public meeting that he spent 80 million on his campaign for the 2009 Lok Sabha election, well above the official limit. ` The routine nature of such violations is buttressed by former Prime Minister Atal Behari Vajpayee's statement to a parliamentary committee that every legislator starts his career with the lie of the false election return he files.

Therefore, one strain of thought argues that expenditure limits need to be raised, since presumably the majority of election costs involve legitimate expenses. This argument is then bolstered by reference to the low levels of expenditure declared by candidates in sworn affidavits. We reject this simplistic reading of the issue.

Firstly, parties conveniently shift expenditure from under the heads of individual candidates to themselves, since there is no expenditure limit for parties. Further, regulation of candidate and party expenditure will likely have limited impact because the loophole on third-party expenditure “on behalf of the party's programme” exists. The net effect of this loophole, as Association for Democratic Reforms (ADR) has argued, is that there can never be any violation of expenditure limits. Secondly, candidates need to spend a threshold amount to be competitive and 5 per voter is hardly sufficient to propagate their message t ` o every household in their constituencies.

Unrealistic caps on election expenditure have had the perverse effect of driving campaign spending underground. This leads to the domination of unaccounted funds or black money in the election process for even legitimate expenses. In turn, this results in adverse selection, where only those people capable of raising and spending black money thrive in politics. Thus, idealistic laws that aim to keep election expenses low have instead become key drivers of crony capitalism. This is propelled by the demand from the political class for finances to run parties and campaigns and the supply of funds from individuals and corporates in exchange for preferential government action. This unscrupulous, symbiotic relationship has led to the institutionalisation and decentralisation of corruption, predatory and inefficient governance, the entry of criminals into politics, and a decline in societal values overall.


It is imperative that election expenditure regulations are reformed in a realistic manner. Therefore, we recommend that expenditure limits be completely abolished. Openly visible expenditure will enhance transparency and the EC can focus its resources towards policing illegal rather than legitimate campaign spending.

Financing Political Parties

In order to meet the range of legitimate expenses discussed above, parties raise funds through membership dues and contributions from individuals, corporates and electoral trusts. To reduce corporate influence in political funding, we need to encourage parties to raise funds from people directly, ideally through small contributions from a large base of supporters. This would strengthen parties by forcing them to engage with the grassroots, while ensuring that supporters are invested in parties and can hold them accountable.

Regulations allow individuals donating to parties to deduct those amounts from their taxable income. Parties were mandated to declare the sources of individual contributions over 20,000. Contributions ` below that amount were lumped under “unknown” sources, thus enabling parties to avoid the cumbersome accounting of small donations. Parties currently derive the bulk of their funds from donations below 20,000 ` from “unknown” sources. However, there is concern that parties convert tranches of black money into numerous cash donations below 20,000, thus getting away without having to declare details about ` contributors. Previously, companies could contribute a tax-deductible 7.5 per cent of their average threeyear profits to parties, with board approval and disclosure. This provision is regarded as having been underutilised because companies fear being victimised by parties to which they made lesser or no contributions.

Another attempt towards open corporate contributions is the tax-exempt “Electoral Trust Companies” scheme notified in 2013 and regulated by the EC. Between 2004-05 and 2014-15, including those years before the law was amended, electoral trusts contributed 5.15 billion to 15 parties, i.e., 28 per c ` ent of their income from known sources (not including other known sources). However, given limited disclosure requirements, in the case of trusts that pooled resources of multiple companies, one cannot ascertain which company funded what party. Overall, electoral trusts ensure that some “white money” is routed to parties. But the influence that individual companies contributing to the trust may exert on parties remains an issue, which has further worsened with the amendments in Finance Bill, 2017.

Finance Bill 2017 – One Step Forward, Two Steps Back

The demonetisation exercise launched by Prime Minister Narendra Modi on November 8, 2016, led to an increased spotlight on the hypocrisy of black money in politics. To demonstrate intent on political reforms, Finance Minister Arun Jaitley introduced amendments to the Finance Bill, 2017 and claimed that they would clean up party funding.

One of the proposals, electoral bonds, requires donors to purchase them at banks, thus ensuring that contributions are in post-tax white money. However, to incentivise individuals and corporates to donate unreservedly, Mr. Jaitley added anonymity to the mix. Parties who receive electoral bonds no longer have to disclose the identities of donors. This adds to the opacity of the process and undermines the fundamental premise that the public has a right to know who is funding which party and thereby possibly influencing policy outcomes. With anonymity, the public will no longer be able to “follow the money” to track corruption. 

Further, Mr. Jaitley removed the cap on corporate contributions (previously 7.5% of net profit of last three financial years). He also removed the requirement for companies to reveal the name of the political party they contributed to and further dispensed away with mandatory approval from their board of directors for political donations.

Mr. Jaitley also lowered the limit for anonymous cash donations from 20,000 to 2,000. This will not ` ` change anything in practice. Parties will continue to funnel black money into their coffers, listing it as anonymous cash donations. Only, now they will have to show 10 times more entries of less than 2,000 ` .

Thus Mr. Jaitley's measures are hardly reforms and the opacity surrounding political contributions has worsened. Between electoral bonds and other changes, the finance minister has opened the floodgates for unlimited anonymous corporate contributions to parties. Other amendments to the Finance Bill enable tax authorities to take action on individuals and companies without having to provide a rationale to authorities (except the High Court). The Modi government has thus created a situation where companies can be armtwisted to contribute to parties, with a possible bias toward the party in power.

The Need for Public Funding

Political finance in India is typically opaque and parties do not usually publish statements of accounts, income and expenditure on their websites. Many parties and candidates resort to unscrupulous methods. The opacity of funding also undermines parties as organizations as only a few leaders hold the reins to the resources and, by extension, decision-making.

John Rawls in conceived "justice as fairness" where the worst-off person in a system is A Theory of Justice provided with opportunities to improve his odds. India's political system has become so beholden to money and muscle power that the worst-off person is the honest politician. Parties will not give an honest politician a ticket to contest elections because she lacks the money and muscle power that would have enhanced her “winnability.”

In order to reverse the descent of India's political system into a corrupt quagmire, we propose public or state funding of elections and political parties. Public funding of elections will ensure a fairer world for clean politicians and, by extension, improve democratic governance. This is in line with a study by the Electoral Integrity Project, which found that the most common reforms across countries in recent years have sought to strengthen disclosure and introduce or expand public funding. 68 per cent (116 countries) of countries have provisions for direct public funding to parties, including 86 per cent of European countries.

Proposal for Public Funding of Elections and Political Parties

Three key factors to consider while outlining a public funding system is to determine the amount of funds required, who receives it, and how it must be distributed. We consider it important to distinguish between candidates and parties, since funding candidates is one way to improve internal democracy in parties.

Further, it needs to be ensured that independent candidates without any political party affiliations can also compete fairly in the electoral arena.

For public funding of election and political parties, we recommend a National Election Fund (NEF), operated by the EC with oversight by the Parliament, thereby reducing any suspicion of arbitrariness or interference by the government. The NEF would dispense two types of grants to parties and candidates. One type of grant is a recurring payment to all parties after every election, based on the number of votes they poll, provided they cross a threshold of two per cent of votes polled of the total electors in a parliamentary or assembly constituency. Each eligible vote would fetch the political party 50 in gr ` ants. Half of this amount is to be disbursed to and spent out of bank accounts operated at the constituency level. The other half would go to the designated central bank account of the party. This will strengthen the capacity of the party machinery at the grass-roots level by providing adequate funds.

The second type of grant consists of matching grants for fully transparent, small donations below 2` 0,000 furnished along with PAN card details of the donor. This grant can be disbursed every quarter to parties and candidates who raise such funds based on the formula below.

A matching grant of 50 will be disbursed to the party from the NEF, for every 100 a party raises in ` ` small donations below 20,000. The option of choosing whether the matching grant goes to the account of th ` e party or the candidate will be given to the donor. The grant can be spent on any legal election expenditure accompanied with adequate documentation.

The eligibility threshold for matching grants is to raise small donations from at least 0.5 per cent of the total electors in a constituency or 5,000 registered voters, whichever is lesser. This criterion is based on the number of supporters rather than the size of donations. A cap of 50 million will be imposed to the ` total amount of matching grants disbursed at the constituency level across parties and candidates. If the overall small donations exceed this number at the constituency level, then the grants will be disbursed proportionately among parties and candidates. An overall fund of 50 billion will be earmarked for m ` atching grants at the national level, over a period of five years, with a pro-rated disbursement cap every quarter. In comparison, 198 billion, i.e., four times the amount is allocated for Member of Parliament Local Ar ` ea Development (MPLAD) funds over a five-year period.

In a country where a vast majority of citizens still do not have access to online banking facilities, it is unrealistic to demand that all donations to parties be made electronically. However, providing matching grants will incentivise parties to move towards a more transparent regime where they are encouraged to eschew big-ticket donations that come with strings attached, but also to fully disclose the details of the small donor. Any party that is registered and meets all the eligibility criteria will have access to both types of grants.

Thirdly, parties' accounts will be subject to audit by the Comptroller and Auditor General. Severe penalties will be imposed for serious breaches in disclosure of small donors below 20,000. Rules for internal ` elections in parties already exist, and will have to be implemented unfailingly. Parties, now that they receive public funds, will be brought under the purview of the Right to Information (RTI), at least on matters of political finance and expenditure.

Fourthly, to promote transparency, we recommend that a separate account of all media advertisements placed by parties and candidates should be disclosed along with their expenditure accounts. Similarly, all media outlets must list every political advertisement carried by their organisation in an annual report submitted to the EC as well as to the relevant bodies like Press Council of India and News Broadcasters Association. They should also be subject to external audit. This measure can be extended towards disclosure of budgets for advertising and branding campaigns spent by the Union and state governments.

Finally, implementation is the key for any reform to be effective. Therefore it is imperative that the EC is empowered to take strict but proportionate measures against violators, while not going overboard with a purgatory zeal.


The Dinesh Goswami Committee on Electoral Reforms in 1990 and the 1998 Indrajit Gupta Committee Report endorsed public funding of elections through in-kind subsidies. We go a step further and recommend direct transfers to fund political parties and election campaigns. We expect that our proposal will challenge the prevailing status quo and set in motion a movement towards transparent political funding through infusion of “white money” without strings attached.

Initially, we might see an increase in overall expenses, as candidates and parties merely add public funds to their election war chests. However, public funding will ensure that all serious political forces have access to adequate resources to cross the threshold of competitiveness, thereby encouraging pluralism and providing the electorate with a wider choice of representatives. Our recommendations will incentivise parties to improve transparency through mandatory reporting requirements, embrace grassroots financing from a large donor base, and thereby eschew dependency on corporate funding. The people of India desire and deserve democratic processes that are clean and competitive. Public funding will ensure that their tax rupees are harnessed to this end.

*M.V. Rajeev Gowda is a Rajya Sabha MP, representing Indian National Congress. He is a former Professor, Indian Institute of Management, Bangalore. Varun Santhosh is an Independent Researcher and Consultant.

The views expressed in this article are personal and do not represent or claim to represent the views of the Indian National Congress in any way.

Volume: Vol. XXXVI No. 1
January-March, 2017