An intriguing paradox of contemporary Indian politics has been insufficiently noted: corporate India finances India's elections, substantially if not wholly, but it is unable to determine election outcomes. Money matters, but it is not always electorally decisive.

The recent Uttar Pradesh elections provide the clearest illustration of this proposition. As is well known, the Congress, BJP and BSP were all better financed than the SP which, especially after the departure of Amar Singh, had lost its biggest conduit to corporate India. But the SP won, and the best funded parties, the Congress and the BJP, lost quite badly. The voter listened more affectionately to the less well-funded.

It used to be said in the 1970s and 1980s that the party that could provide blankets, saris or liquor to the voters would swing the elections in its favour. By now, all major parties have the capacity to provide such side benefits and more; the voter collects them from each party; and then she goes to the polls and votes according to her conscience. India has reached a new point in its electoral history. Votes can't easily be bought.

In political and corporate circles, the empirical validity of this paradox  businesses funding elections, but unable to determine election results  has long been noticed. But in intellectual circles, very few have systematically analysed this aspect of Indian democracy. In the US, how elections are financed is a huge and recurring topic of public discussion. India has, on the whole, shied away from such debates. Indian democracy will be better off if we explicitly analyse the larger implications of election funding and put our findings and arguments in the public domain.

There was a time, roughly until the mid-1960s, when political campaigns cost very little and were heavily, though not entirely, financed by janata ka chanda (citizen contributions). Mahatma Gandhi was India's first, and most original, political party builder. After the 1920 Nagpur session of the Congress party, he invented the four anna (roughly 25 paise) per year membership. At today's prices, that amount would perhaps add up to Rs 50-60, roughly equal to one US dollar. A Gandhi-led, reinvigorated Congress raised a lot of funds through this method, and also took the freedom struggle to the masses.

But Gandhi was realistic enough to know that membership dues alone could not generate enough funds for the freedom movement. Fighting the mightiest empire of the world required greater resources. Gandhi was, therefore, not averse to courting businessmen for funds, a pursuit in which he brilliantly succeeded.

After commenting that "Gandhiji was something of a genius in collecting money", the late Gopal Krishna, in a classic study of the period, notes: "The Parsi and Marwari businessmen made really large contributions... Gandhiji was able to make them open their purses for the national cause. Seth Jamnalal Bajaj gave a donation of Rs 2,00,000. Bombay City contributed nearly 30 per cent of the total collection. Godrej, a Parsi businessman, gave a donation of Rs 3,00,000; Seth Anandlal Poddar, a cotton broker, gave Rs 2,00,000; other stock exchange brokers, Rs 5,00,000; and the Associations of Rice and Grain Merchants each Rs 1,00,000."

Measured in today's prices, these would be large sums of money. Clearly, not simply the masses, India's businessmen, too, handsomely contributed to the freedom struggle. Equally important, these contributions were legal and above board. Business and politics were intertwined in a virtuous circle.

How does the current situation compare? In a meticulous recent paper, Rajeev Gowda (IIM-Bangalore) and E. Sridharan (University of Pennsylvania Institute for the Advanced Study of India, Delhi) provide an enlightening account. Published in the truly arcane Election Law Journal, the paper deserves wide readership. It can be accessed at http://bit.ly/ GowdaSridharan2012.

Gowda and Sridharan review the history of election finance laws in India and compare it to such laws in other democracies, but the core of their argument is based on confidential interviews in Delhi, Bangalore and Mumbai: with current and former ministers, treasurers of the Congress and BJP, office holders of several political parties, top bureaucrats, and major business donors to parties. One cannot write about election finance in India without taking politicians and businessmen into confidence. Confidentially generated insights and data lent credibility to their arguments.

The year 1968 was a turning point in the history of election finance in India. Indira Gandhi outlawed corporate donations to political parties, but she did not move towards state funding as a substitute, as is true of most continental democracies. Citizen contributions were the only legal option left, but political parties turned increasingly towards illegal corporate donations, or black money. It was easier to raise large sums from a few businessmen, and harder to collect small sums from millions of citizens.

A veritably corrupt business-politician nexus was thus born. Given the heavily state controlled economy, Indian business could use politicians to get particularistic benefits: an import duty relaxation here, an industrial licence there. And politicians got access to a huge pool of funds. This was a striking departure from the Nehru era when, some exceptions notwithstanding, campaign financing was quite clean. Corporate funds were legally available, but the guiding assumption of politics was that for politics to remain honest and value-laden, a political party had to rely on the small contributions of citizens.

While this story is well known, the more recent developments are quite puzzling. Corporate donations to political parties were re-legalised in 1985, and after 2003, businesses were also allowed tax incentives for their donations. Yet, most, though not all, business donations have continued to take the form of black money. Cheques are not normally written. Why should this be so, despite tax incentives for business donations?

Essentially, it is clear that two decades of economic liberalisation notwithstanding, the government still has a lot of control over economic activity, especially mining, real estate and large industrial projects. On the basis of their confidential interviews, Gowda and Sridharan conclude that "industry is averse to alienating parties that are in power or that may come to power... Maintaining confidentiality of donations helps avoid reprisals by political parties that might want to penalise the donors for favouring their opponents; this is generally regarded as more important than any tax benefits."

The implications of this argument should be obvious. As India's democracy has turned more competitive and elections have become more unpredictable, corruption has increased, not gone down. We should celebrate the greater political competitiveness, but not the larger corruption. We need to uncouple the two.

For cleaner politics and more honest business, a vigorous debate on the reform of election finance laws is necessary. India's election war chests are awfully murky.

The writer is Sol Goldman Professor of International Studies and Social Sciences at Brown University, where he also directs the India Initiative express@expressindia.com

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