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Approach:

  1. Intro – contextualise the ques statement.
  2. Briefly define electoral funding and the laws governing it.
  3. Issues with electoral funding in India.
  4. Mention the points of reforms + give Law Commission’s recommendations.

The Association of Democratic Reforms (ADR) recently released an analysis report on Sources of Funding of National and Regional Political Parties. The report has provided some startling observations. The total income of national and regional parties from unknown sources for FY2020-21 stood at INR 690.67 crore. Between 2004-05 and 2020-21, the national political parties have collected more than INR 15,077 crore from unknown sources.

Political experts argue that the opacity in electoral funding is the single biggest factor in political corruption in India.

What is electoral funding ?: Money received by the political parties and the expenditure done by them in the process of election (directly or indirectly) come under the ambit of Electoral Funding/Financing. Electoral funding in India is broadly governed by the provisions of the Representatives of People Act, 1951; the Conduct of Election Rules, 1961; the Companies Act, 2013; and the Income Tax Act, 1961.

Issues with electoral funding in India:

  • Lack of Transparency: Large proportion of electoral funding comes from unknown sources. This is basic violation of transparency principles as electorate has a right to know whether the funds are being raised through legitimate means. The electoral bonds also suffer from this lacuna, and citizens are unaware about who is funding the political parties.
  • Corruption and ‘Regulatory Capture’: Activists argue that the unknown ‘donors’ include large corporate houses, or corrupt local businessmen who fund local political leaders. This makes the political leadership amenable to business interests. The current system tolerates lobbying and capture.
  • No Limit on Funding: Earlier there was a cap on how much funds a corporate can donate to a political party out of the profits it earns. That upper limit has been removed. This has opened an avenue for corporates to increase funding to political parties and consequently increase their influence on the political system.
  • Lack of Equity : Access to large financial resources translates into electoral advantage. Richer candidates and parties have a greater chance of winning elections. This distorts the level playing field. The Supreme Court has also supported this view in the Kanwar Lal Gupta v Amar Nath Chawla.
  • Contravention of Laws: Lack of disclosures contravenes various laws and ECI notifications. In spite of the Central Information Commission (CIC) ruling, all political parties have refused to submit themselves to the transparency that comes with Right to Information. The Supreme Court had recognized this reality in PUCL v Union of India.
  • Issues with electoral bonds:
  • The introduction of electoral bonds not only increased the number of anonymous donors, but also the number of shell companies donating to political parties.
  • Electoral bonds lead to information asymmetry.
  • Since the identity of the donor has been kept anonymous, it could lead to an influx of black money; and there is a threat to the spirit of democracy. The Election Commission in April 2019 told the Supreme Court that it did not approve of anonymous donations made to political parties, though it was not against the Electoral Bonds Scheme.
  • One of the arguments for introducing electoral bonds was to allow common people to easily fund political parties of their choice, but more than 90% of the bonds have been of the highest denomination (Rs 1 crore).

Reforms needed in electoral funding:

The funding process should be made completely transparent. The ADR Report has recommended that full details of all donors should be made available for public scrutiny under the RTI. There should be an upper limit on the amount that can be donated to parties. Electoral rules should be amended to regulate political advertisements, outline permissible categories of expenditure, prevent foreign sources of donations and lay down a limited base for public funding.

The ADR Report has recommended that scrutiny of financial documents submitted by the political parties should be conducted annually by a body approved by CAG and ECI. The ECI has recommended that tax exemption be awarded only to those political parties which contest and win seats in Lok Sabha/Assembly elections. Additionally, the Law Commission’s recommendations on electoral finance should be followed.

Law Commission’s 255th Report recommendations:

  • Authorisation of political funding by a corporate should be done at the Annual General Meeting.
  • Extension of norms of disclosure by candidates about their election expenses including funding received from NGOs or a person or from parent political party.
  • Public disclosure of electoral expenses documents.
  • Disclose contributions less than INR 20,000 if such contributions exceed INR 20 crore or 20% of the party’s total contribution, whichever is less.
  • Upon failure to disclose expenses, disqualification should be extended to 5 years.
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