Lack of transparency in political funding had been the proverbial elephant in the room in the Modi government’s attempts to seek political credit for crackdown on black money after the demonetisation exercise on 8 November, 2016. Union finance minister Arun Jaitley tried to address this in the 2017 Budget with two major announcements—reduction of upper limit for political parties receiving anonymous cash donations from Rs20,000 to Rs2,000, and a proposal to float electoral bonds. While the government deserves credit for bringing the agenda of political funding on the table, would these announcements be effective in addressing the issue at hand?

According to a report released by the Association for Democratic Reforms (ADR), around three-fourth of the total income of national parties (BJP, INC, BSP, NCP, CPI and CPM) between FY2004-05 and FY 2014-15 was from unknown sources.

The ADR gives a three-category classification for sources of income for political parties: unknown sources, known sources and other known sources.

Known sources are those where details of donors who have made contributions above Rs20,000 are given. Other known sources of income include sale of moveable & immoveable assets, old newspapers, membership fees, delegate fee, bank interest, sale of publications and levy whose details would be available in the books of accounts maintained by political parties. The unknown source category has no information whatsoever about the donors. While regional parties have a higher percentage share of anonymous political funding in their total income, big parties got bulk of the money in actual terms. The Congress, which was in power for most of this period, had the highest income from unknown sources.

There is little doubt about the fact that the bulk of money which is shown as received under unknown source category constitutes of black money. What vitiates matters even more is the fact that political parties themselves are suspected of fudging their accounts. 41 out of 51 political parties covered in the ADR report cited above had not submitted their income tax return for at least one year between FY 2004-05 and FY 2014-15.

Even when returns are filed, parties’ refusal to allow independent audits allows them to get away with bungling in their accounts.

A cursory examination of election expenditure accounts for 2014 Lok Sabha elections submitted by some major parties buttresses these apprehensions. For example, BJP’s central headquarters claimed that it did not even spend one rupee in cash in the 2014 Lok Sabha elections. Even other political parties report very low cash expenditure. Claims of such low cash expenditure in a mass exercise like elections seem fishy, to put it mildly. Contrast this fact with the popular notion that demonetisation was going to create difficulties for political parties by making their hoarded cash useless!

It needs to be kept in mind that the money which has been discussed above does not include the amount spent by individual candidates in their constituencies. While the official limit for spending in a Lok Sabha constituency is ₹ 70 lakh, it is an open secret that candidates spend way above these limits. The election commission seized ₹ 331 crore in cash during the 2014 Lok Sabha election.

Milan Vaishnav, senior fellow at the South Asia Programme at Carnegie Endowment for International Peace in Washington DC, has dealt with the question of criminality and dirty money in Indian politics in detail in his latest book When Crime Pays. We reproduce here one chart from Vaishnav’s book which shows that probability of a winning elections for a candidate increases with wealth and criminal background. The figures are based on analysis of “nearly all state legislative candidates seeking office between 2003 and 2009".

It is unlikely that just reducing the upper limit for accepting anonymous donations from ₹ 20,000 to ₹ 2,000 is going to put an end to this large-scale malfeasance in political funding. As far as the scheme for electoral bonds is concerned, it would work on the principle of willing donors purchasing these bonds from a bank which would only be redeemable in designated account of a registered political party. These bonds can be useful for somebody who wants to donate money to a political party while retaining his/her anonymity. However, those who route unaccounted income to political parties would have little incentive to use this option as it would leave a money trail on their end, making them vulnerable to tax queries.

It would be naive to assume that black money based political funding is only a preserve of those who operate locally. An earlier Plain Facts column had discussed how shady deals involving areas such as extraction of natural resource extraction first created an economic boom and then plagued the Indian economy into a policy paralysis during the reign of UPA-II government. It is very likely that such deals would have involved illicit money changing hands between big business and politicians.

In another jointly authored article, Vaishnav has argued that the overarching control of state allocation of various resources creates a natural basis for collusion between politicians and businessmen. While there is a lot of merit in this argument (think of scams such as 2G and Coalgate), reducing state discretion is unlikely to act as a silver bullet in dealing with dirty money and corruption in politics. The US, where the state has much less discretionary powers compared to India, and lobbying disclosure regulations are much more strict, was not very different in terms of public perception of corruption among politicians and political parties, showed a survey by corruption watchdog Transparency International in 2013.

Transparency in political funding can only be achieved by a two-way overhaul of the existing system. Political parties must be mandated to make complete disclosures on every bit of funding and allow for independent audit of their accounts. It is the non-transparency in explaining the source of their income which encourages political parties to field candidates with criminal background, who bring with them deeper pockets.

At the same time, the electorate also has to be given incentives to not support politicians with murky backgrounds. An even more disconcerting finding from Vaishnav’s book is that voters are willing to vote for criminal candidates despite being aware of their criminal links, as they can help in getting things done in a society where democratic, social and economic change has outpaced governance and created a vacuum of authority. Unless this changes, transparency would achieve little to clean political funding.

The short point is, surgical strikes would not take us far in dealing with the cancer of dirty money in politics. It requires a full-blown war.

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