Reforming political finance


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IT has long been common knowledge in India that raising funds for elections is a pressing imperative for politicians and, in turn, this imperative is one of the most powerful motive forces behind political corruption. The hawala scandal (of payoffs to politicians of most major parties via illegal foreign exchange transactions) that broke in January 1996, focused public attention on both corruption and the underlying imperative for politicians of raising election funds for their parties and themselves. So did the website’s expose of corrupt fund-raising in connection with arms deals in March 2001. They highlight the need for reform of party and election finance, including the possible option of state funding of elections. Political finance reform is also linked to the stability of democracy itself because if election funds are raised by corrupt means, cynicism about parties and politicians can become widespread.

There are a variety of arrangements determining political, including election, finance around the world.1 Political parties need funds for three activities: election campaigns, inter-election maintenance of their organizations and political activities, and support of research and information infrastructure for the parties. In most cases election campaigns are the primary visible activity requiring funds. Historically, this has made political parties excessively dependent on big business and wealthy individuals, especially parties of the right and centre. Parties of the left became dependent on the collective contributions of workers, often channelled through affiliated trade unions. Such interests, typically, seek rents as a quid pro quo for political donations.

The origins of election finance reform have three roots: corruption scandals, rising campaign costs, and public concern for equal opportunity for political participation. In India and elsewhere it was widely felt that a free-for-all system of election fund-raising gave excessive power to wealthy individuals and big business, not only over left-of-centre parties, but even pro-business parties and politicians.

The introduction of public funding in Germany by the Christian Democratic Adenauer government in 1959 was partly due to politicians’ need for autonomy from financial supporters as well as the desire to reduce costs. An important point to note for India is the fact that the type of party system prevailing at the introduction of public party or election funding in all countries was, typically, one without a perennially dominant party.

The thrust of political finance reform in democracies worldwide had four main characteristics: limits on expenditure including sub-limits on particular expenditures; limits on contributions from individuals and organizations; public funding, full or partial, of elections and/or parties; and reporting and disclosure of election, party and candidate finances in some form as an administrative pre-requisite for implementation of any or all of the above.

Limits on expenditures have been applied more frequently than limits on contributions to parties/ candidates. Expenditure limits have been applied to election campaigns, usually limited to the formal period of the campaign, rather than to general party expenditures. The goal is to reduce costs for all contestants, thus indirectly addressing the issue of equality of political opportunity. Usually the limits apply to the amounts that candidates and/or parties may spend on election campaigns. Within these overall maxima there are often limits on the amounts that may be spent on particular items, for example, broadcasting, advertising, wall posters and billboards.



Contribution limits by individuals and organizations have been introduced primarily to address the problem of equality of opportunity by lessening dependence on a small number of wealthy donors and making candidates more responsible to the grassroots. Ceilings on contributions may apply both to donors and recipients, that is, recipient parties and candidates may face limits on amounts they receive from certain categories of donors and/or from any single donor, forcing them to broad-base their fund-raising efforts. Potential donors may face limits on how much they can contribute per candidate, per party or per year.

In some countries, like the United States, there may be bans on certain organizations (like corporations and trade unions) from making election contributions to parties or candidates. However, intermediary organizations, like political action committees (PACs) in the United States, may be allowed to receive and channel corporate political contributions, though they too may face limits on amounts per donor as recipients and amounts per candidate as donors.



Public funding can be predominant or partial, and it can be limited to elections or encompass funding of parties. The latter is less common, confined largely to Europe. Public subsidization of parties can be directly to central (Italy) or lower-level offices (Sweden), to parliamentary caucuses, or party foundations (West Germany after 1967). In most of these countries, there is also public subsidiza tion of elections funded separately or included in party subsidies. Subsidization of parties is the norm in Scandinavian countries, Austria, Germany, Italy and Israel. In several other countries like the USA, UK, Australia, New Zealand, Canada, France and Japan (until 1994) there is no public subsidization of parties, only of elections, wholly or partially, using a variety of mechanisms. Such funding is usually channelled through parties, except in the USA.

Public funding of elections and/or parties was introduced from the mid-1950s (Costa Rica 1954, Argentina 1955); among stable democracies, in Germany in 1959. Countries which followed suit were Austria (1963), France (1965), Sweden (1966), Finland (1967), Denmark (1969), Israel (1969), Norway (1970), Netherlands (1972), Italy (1974), Canada (1974), United States (1976), Japan (1976), Spain (1977) and Australia (1984).

Public funding, full or partial, can be organized into four categories which exist in a variety of combinations in different countries. These are: first, direct grants/reimbursements to political parties/candidates not tied to particular expenditures; second, specific grants earmarked for particular items of expenditure; third, provision of certain services, free or subsidized, by the government or government-owned organizations; and fourth, indirect subsidies such as tax incentives and relief. The criteria for allocation of public funds can be on the basis of seat or vote share in the last election, usually on the basis of complicated formulae. In some cases where election expenses are reimbursed on a per seat or per vote basis, it can be on the basis of performance in the recent election. In the case of the USA, the federal government subsidizes only presidential primaries and elections by a matching grant system.



Reporting and disclosure requirements have been implemented simultaneously with limits on election expenditures and/or political contributions, and public subsidies to parties/candidates. This necessitates the institutionalization of legal requirements for disclosure of party/candidate income and expenditures. The general trend is towards greater transparency. The reporting interval is every campaign (especially in countries which subsidize or regulate elections rather than parties), and/or annual.

Expenditures are required to be reported in all cases and, in most cases, contributions. Audit of accounts of political parties’ and/or candidates’ campaigns is commonly, but not always, required. Most countries have the further requirement of disclosure, that is, it is not sufficient to file audited statements of accounts to the appropriate public authority in confidence (similar to the requirement of filing of income tax returns by parties in India). These records must be made publicly available, including to the press and political rivals.



The examination of electoral and party finance regulation reveals three patterns upon which one can draw to devise a system of political finance regulation for India. One is a minimalist pattern, another a maximalist pattern and in between are various mixed patterns.

The minimalist pattern obtains where only elections are partially subsidized, usually through specific grants or state-rendered services. Candidates are accountable to the public authority for observance, reporting, and disclosure of limits on, mainly, expenditures for the limited election period. Transparency of income, expenditures and functioning is mainly due to party membership pressure rather than legal requirements. The UK, Ireland, Australia, New Zealand and Canada are examples of the minimalist pattern.

The US pattern is a variant of this minimalist pattern, even since the Federal Election Campaign Act of 1971 and the 1974 amendments limiting contributions. Election funding is private and candidate-centred, but subject to strict reporting, disclosure requirements and limits on contributions. Japan also falls into the traditionally minimalist pattern before and after the 1994 reforms, despite limited party financing other than for elections.

The maximalist pattern of state funding focuses on political parties, rather than elections, whether to parties, parliamentary groups, or party foundations. Under this pattern, public funding is not merely for elections, but for other party activities, and it is the primary source of party finance. ‘Maximalist’ systems are commonly characterized by multi-level party funding wherein national, regional and local governments fund corresponding party units as in Sweden and Germany. This pattern is also associated with less detailed regulation of contributions and expenditure, including of election expenditure limits, because parties are largely dependent on state support. Legal requirements force internal democracy (Germany) and general transparency (as in Scandinavian countries) making formal reporting requirements less necessary.

In between are a variety of mixed patterns, for example, France, Netherlands, and among relatively recent democracies, South Korea. These are not mainly state subsidized party and electoral systems, but usually have partial reimbursement or public funding of elections on a matching grant basis.



In all three patterns, parties and candidates are allowed to raise private contributions in addition to state funding, but must observe regulatory requirements on expenditure and contribution limits, reporting and disclosure, and other matters. An important question from the Indian point of view is whether expenditures by the party or independent expenditures by candidate supporters are calculated into the limits on expenditure.

In the UK, there are strict rules defining election spending, with private spending in aid of a particular candidate with or without authorization considered for the limit and held illegal. However, there are no limits on party expenditure if it is not promoting a particular candidate’s election. In the USA, there are no limits on ‘independent expenditures’ by individuals and groups including PACs. Such expenditures do not count as political contributions and are therefore not subject to contribution limits. In Japan, until 1994, legal loopholes have enabled politicians and businesses to evade virtually all legal restrictions on contributions and expenditures.



Four broad conclusions can be drawn from the literature. First, public funding has not frozen party systems either by preventing alternation in power or by preventing the entry of smaller new parties. Second, public funding does not necessarily reduce election spending. In several countries election spending rose despite public funding due to increased political rivalry combined with the fact that private funds could be raised alongside public funding, or parties agreeing among themselves to increase the level of public funding.

Third, if state funding is routed directly to candidates, bypassing the central party leadership, then lower-level leaders and party factions are strengthened and can demand policy changes or even threaten secession. Parties can come under pressure to decentralize and democratize. New parties can emerge from factional secession. Fourth, limits on expenditure and contributions do not necessarily eliminate corruption and wrongdoing. If, as in the USA and Japan, the net effect is to greatly increase candidates’ imperative to raise funds, then evasion of legal restrictions becomes common.

These conclusions stress the key role of design in whether political finance reforms lead to reduced campaign costs, less corruption and greater equality of political opportunity. Is there to be public subsidy of parties or elections only? Are there to be limits and sub-limits on expenditures, contributions, both or neither? Are public subsidy levels realistic in relation to campaign costs? Are public subsidies to be based on vote or seat shares, paid in cash or kind, in advance or reimbursed, to central party leaderships, regional/local leaderships or candidates? Are additional private funds to be allowed? Will party and supporters’ spending count as election expenses? Will donor identities have to be disclosed? We shall discuss various possible options for political finance reform in India after reviewing the Indian case.



Traditionally, political parties in India financed themselves through private donations. Company contributions to political parties were legal, subject to certain restrictions, and had to be declared in the company’s accounts. There were limits on election expenditure since the Representation of the People Act (RPA) 1951. Company donations to political parties were banned with effect from 1969.

An important development was the amendment of the RPA in 1975 to nullify the Supreme Court’s judgment in the Kanwar Lal Gupta versus Amar Nath Chawla case that party spending on behalf of a candidate should be included in election expenses for the purposes of the ceiling. Explanation 1 to Section 77(1) of the RPA was appended, by which party and supporter expenditure not authorized by the candidate did not count in election expenses in total contrast to the UK position. This made the limit on election expenditure farcical.

Political parties were exempted from income and wealth taxes from April 1979 provided they filed annual returns including audited accounts and identities of donors. The main development in the 1980s was the amendment of the Companies Act in 1985, which by Section 293A, once again allowed company donations to political parties and individuals under certain conditions, most importantly, a ceiling of five per cent of average net profit over the previous three years, subject to approval by the board of directors and disclosure in the profit and loss account. However, the overwhelming majority of the contributions have continued to be by the black money route, since utilizing the provision means revealing party identification and possible problems with shareholders.

In 1990, the National Front government set up the Goswami Committee on Electoral Reforms to look into the matter including election financing. Its report did not advocate state funding except limited support in kind for vehicle fuel (usually the main campaign expense), hire charges for microphones, issue of voter identity slips and additional copies of the electoral rolls. It did not include spending by independent supporters in the election expenditure limit but made such unauthorized spending a penal offence. It also advocated a ban on company donations to political parties. The report, therefore, left an uncovered gap in the necessary election finance requirements of parties because, while banning company donations, it did not provide adequate state funding. The bill was introduced in Parliament on 30 May 1990 but lapsed.



In 1993, the Confederation of Indian Industry (CII) set up a task force which recommended that corporate contributions be made tax-deductible and that board decisions should be required to be confirmed by shareholders. The CII has also recommended state funding of elections, the funds to be either raised by a cess on excise duty or by contributions by industry to an election fund pool managed by the state, from which money should be distributed to parties by formula; in effect, an election tax on industry.

Two important developments took place in 1996. The first was the Supreme Court’s notices to political parties in January to file returns required by the Income Tax and Wealth Tax Acts by 20 February, in response to a public interest petition filed by a private citizens’ group, after the parties did not respond to notices issued by the Income Tax Department. This forced parties, none of which had filed for all the years since 1979 as required, to do so. However, they did only for 1994-95, with the Congress, Bharatiya Janata Party (BJP) and Janata Dal declaring a suspiciously low combined income of under Rs 17 crore! In future, this will place some transparency constraints on parties’ finances, although the income tax returns filed are not open to public scrutiny.



The second important development was the Supreme Court’s order of 4 April, shortly before the general elections, interpreting Explanation 1 of Section 77(1) of the RPA such that election expenditure by a political party would not be clubbed with that of a candidate for the purposes of the spending ceiling only if the party had submitted audited accounts of its income and expenditures, something that no party had done. This constrained conspicuous party spending on behalf of the candidate during the 1996 campaign.

As for the 1998 election, the RPA Amendment Bill passed in July 1996 by the United Front government, facilitated cost reduction by reducing the campaign period from 21 to 14 days. The expenditure limit, which had been kept artificially low at Rs 1.5 lakh for Lok Sabha and Rs 50,000 for state assembly constituencies in most major states, until it was revised to Rs 4.5 lakh and Rs 1.5 lakh, respectively, for most states in 1994. This was the limit in the 1996 elections, and was revised upwards on 31 December, 1997 to Rs 15 lakh and Rs 6 lakh respectively, for major states, which is the current position. However, Explanation 1 to Section 77(1) of RPA was retained, and election campaign expenditure statements filed by candidates and parties with the Election Commission are not open to public scrutiny.



Another noteworthy development is floating of election funding trusts by some large business houses prior to the (then unanticipated) 1998 elections. The Tata group’s initiative of September 1997 to set up a election fund pool from which contributions would be made to all qualifying political parties, according to certain criteria, is a way of reducing extortionate demands on them while practicing transparency, without getting politically identified with any party due to the fact that allocations to parties will be formula based. The A.V. Birla and Mahindra and Mahindra groups followed suit in early 1998.

An important development in the 1998 elections was the generous allocation of free time on state owned television (Doordarshan) and radio (All India Radio). Free time was allocated to seven national and 34 state parties, totalling 61 hours on each of the two media, divided appropriately between national and regional channels, on the basis of a formula based on a certain minimum time topped up by additional time in proportion to vote share in the 1996 elections.

This was further enhanced in the 1999 election, which was the most televised election in India’s democratic history. The then six national and 48 state parties were allotted a total of 126 hours for telecast/broadcast over Doordarshan and All India Radio, including ten minutes time given to each state party on the regional satellite services channel of Doordarshan available to viewers across the whole of India and the national hookup of All India Radio.

The Indrajit Gupta Committee on State Funding of Elections, in its report in 1998, recommended partial state funding mainly in kind, but remained non-committal about Explanation 1 to Section 77(1) of the RPA. Since then there has been stagnation in the public debate on election funding reform, despite the expose pushing the issue into the limelight. Most recently, in August 2001 it was reported that the finance ministry had, for budgetary reasons, taken an internal position against state funding.



Another proposal which has come up during August 2001 is one that corporate political contributions be made tax deductible. This has also been made by the Hyderabad based NGO, Lok Satta, which further includes tax-deductibility for individual contributors, along with a whole package of other points, including very strict transparency measures for both parties and candidates, including declaration of assets of the person concerned and family members, and strict penal provisions.

However, Lok Satta’s suggestion of tax deductibility for transparent corporate contributions is restricted to corporates which do not receive state subsidy or have a decision, contract or license pending with government. If government includes public sector companies and public financial institutions, this would rule out most major private corporations as most would have decisions on contracts or loans pending. Lok Satta has also proposed public funding to recognized party candidates subject to intra-party democracy, suggesting the German model of regulation of party affairs by law.



At the outset it needs to be emphasized that election finance reform in India involves two related but distinct issues. One is the cost of elections per se. The other is politicians’ imperative to raise election funds and, hence, the temptation to abuse power. In theory, it is possible to reduce the cost of elections without reducing the imperatives of politicians. It is also possible, in theory, to reduce considerably the imperative to abuse power to raise election funds without reducing the cost of elections.

In the first case, even if the cost of elections were reduced they would still cost something not inconsiderable and that money would have to be raised from private contributions. This would still lead to strong pressures to raise money by illegal means while in office even if the amount were frozen or reduced, making it difficult to effect any real deregulation in the government.

In the second case, it is possible to greatly reduce the imperatives for corruption, to the extent that they arise from the need for election funds, even without reducing election costs if state funding of elections is instituted. State funding will provide a financial floor to parties and candidates. Fund raising will no longer be a political life-or-death imperative. This opens up the possibility of greatly reducing corruption. While the two issues are complementary we make the point to underline their distinctiveness. The link between these two issues is that both kinds of reduction increase equality of political opportunity, an important objective for democracy in a poor country.

Deriving policy mixes from actual and possible variants of the three broad international patterns of election finance reform, i.e., minimalist, maximalist and mixed, there are, broadly speaking, the following six options that are available for India in increasing order of magnitude of their distance from the status quo.



The first option, would be a minimalist pattern of state regulation on the present U.K. model. It would consist of limits on candidate spending but no state funding other than free media time. Party spending would be allowed without limits if there is no mention of any candidate, but will be clubbed with candidate spending and deemed authorized by the candidate if it identifies candidates. Private spending in aid of a candidate’s election will be deemed authorized by the candidate and be illegal. Under this option there will be no limits on contributions to political parties except that of 5% of average net profits over the past three years under Section 293A of the Companies Act.

This option has several potential problems. One is that if there are no limits on party expenditure so long as parties do not campaign for identifiable candidates and/or if they submit audited accounts, the latter being the present position, then there are no effective limits on campaign spending. Second, if the requirement of audited accounts and transparency of expenditures is not applied down to the lowest levels of parties, transparency will not be achieved. Both expenditure and fund raising can take place at lower levels of the party hierarchy. In fact, the BJP and the CPM among major parties, both raise and spend election funds in a major way at the constituency level. If this loophole of levels is left open, election expenditure limits will remain ineffective and corrupt fund raising will continue.

The second option would be an extended minimalist option consisting of the above with either separate limits on party expenditure in addition to limits on candidate expenditure, or clubbed party and candidate expenditure with revised limits, disallowing independent private spending. This would introduce more effective limits on election spending and help restrain costs, provided there is strict monitoring of election expenditure, as well as more stringent reporting and disclosure laws covering not only the election period for parties and candidates, but requiring annual audited accounts covering incomes and expenditure at all levels of the party organization and open to public disclosure. Detecting independent private spending will still be very difficult.



A third option would be the same as the second but with limits on contributions, based on the U.S. model. It would introduce limits on contributions by amount per donor for different categories of donors, all of which will have to be disclosed. This option will also face severe practical problems. For one, limits on contributions in the absence of state funding of elections let alone parties will work only if expenditure limits are effectively implemented.

The lesson of the U.S. and Japanese experience is that limits on contributions per donor do not work in the absence of effective capping of election expenditures since costs are not capped while sources of funds are. Indeed, they generate more pressure for fund raising from a larger number of donors, especially where parties or faction leaders are weak and candidates have to bear the burden of fund raising. This is what led to several corruption scandals in these countries.

Additionally, limits on contributions will be extremely difficult to monitor in India, the bulk of contributions being made from unaccounted cash reserves and/or in kind. Unless political contributions are made tax deductible or allowable as a business expense, to which there can be other objections on grounds of public interest and principle, and unless businessmen are less vulnerable to discretionary regulatory decisions, there will be no incentive to shift to payment by cheque. A major deterrent to the latter is the fact of a still highly regulated economy where business donors do not want to get identified with any political party and possibly offend other parties.

The problem with modified minimalist options that do not include state funding is that politicians will still have to raise sizeable funds privately even if expenditure limits reduce costs. Unrealistic expenditure limits will be unenforceable while realistic expenditure limits will mean that that much more fund raising will be necessary. Given the realities of discretionary regulation and the existence of a large black economy, it will be very difficult for political donations to be enforced through company contributions under Section 293A even with tax incentives. Party and supporter expenditures will be extremely difficult to monitor even if they are declared includable in candidate spending or illegal respectively. Thus, modified minimalist options will be ineffective in reducing corrupt fund raising, leaving state funding as the only serious option.



The fourth option is the introduction of partial state funding of elections along with limits on expenditures as in the second option above, representing a mixed option. This would partially reduce the pressure on political parties to raise funds, including by corrupt means, and would therefore contribute to deregulation and transparency in economic policy and administration.



The fifth option is an extension of the fourth – one of comprehensive state funding of elections. The issue that will remain is whether parties will be allowed to raise additional private funds for elections. As long as state funding covers only elections and not the inter-election activities of political parties, the latter will have to raise funds for such activities from private contributions. It will be very difficult to check the use of such funds for elections in addition to state support.

A complementary measure would have to be a ban on company donations to political parties and candidates for elections. The reporting of expenditures and incomes, and related internal democracy, transparency and accountability, requirements for political parties and candidates, will have to be more stringent, and open to public disclosure, as will have to be the monitoring of election expenditures by the Election Commission as in 1996.

The fourth and fifth options of partial and full state funding of elections raise a number of issues. The fourth option has several inherent difficulties in the Indian context, although it is, in fact, close to the Goswami and Indrajit Gupta committees’ recommendations of partial state funding in kind only. First, it needs to be emphasized that state funding in cash or kind must be comprehensive, covering all major electioneering requirements, to be effective in removing the imperative to raise political funds in corrupt ways.

Second, state funding of any kind raises the crucial issue of who is to be funded, parties or candidates, the related issue of the transparency of party accounts, and the even more critical issue of intra-party democracy. Party funding implicitly assumes this but Indian parties have little or no internal democracy. Funding parties will only strengthen the powers of leaderships, most of which will probably be unwilling to accept statutory regulation of their affairs, internal democracy and transparency. But these features are essential for the financial accountability necessary for state funding.

Therefore, for the viability of even partial state funding, reporting and disclosure requirements will have to encompass the adoption of party constitutions, internal elections and clear responsibilities. This will meet with strong resistance from parties. If state funding of elections is introduced for parliamentary elections in a federal country, it will also have to be introduced eventually for state assembly elections if the objectives of reducing election expenses of parties and reducing political corruption are to be achieved. State level leaders of all parties are bound to insist on distribution of funds to their level directly, for state assembly if not parliamentary elections, or else they will become even more dependent on national party leaderships.



Another issue will be the eligibility criterion for state funding. Past performance is the usual basis in with a qualifying cutoff. However, if based partly on the results of the election to be contested, overpaid parties will have to reimburse, and underpaid parties be reimbursed by, the state after the election. If independents are eligible, subject to cutoffs, then aspirants or sitting MPs who do not get nominations but qualify by past vote percentage criteria in their constituencies, may secede and contest as independents, undermining parties.

Another issue will be the basis on which state funds are to be allocated to parties. In a plurality-rule election system with seat-vote dis-proportionality and much larger fluctuation in seat than vote shares, seat shares will not be acceptable to most parties. Nor may vote shares be fully acceptable in an era of flux. Also, funding on a reimbursement system as in Germany or Italy will not work since money is needed in advance; if not available then it will inevitably be raised by corrupt means. These are issues to be thought through since any system of state funding will have unanticipated first and second order consequences since it alters the style of functioning of, and power relationships within and between parties.



A sixth option is the public funding of parties on the maximalist pattern. This can be either comprehensive funding of parties for all their activities including elections, or on a matching grant formula basis against funds raised by the parties themselves. The other requirements of this option would be the same as for the fifth option. This option will be the most expensive. More fundamentally, political parties are not constitutionally recognized entities unlike in, say, Germany, not to speak of not being institutionalized, with all the difficulties for any kind of state funding that it implies.

As emerged in German constitutional court judgements, it is debatable in principle whether full state support to political parties is justified. Political parties are free associations of citizens for political purposes, and such free associations should be able to prove their independent viability by raising the bulk of their own funds; or so it can be argued. State support for political parties may only encourage the proliferation of fund seeking parties or the breakup of existing parties by ambitious faction leaders. This option is thus unworkable in the Indian situation, especially when the party system is fluid.



Any reform of political finance has to be not only in the public interest but also in the interest of existing political parties to have a realistic chance of acceptance. It can be conceptualized as a collective action problem between parties. The conditions for collective action did not exist until 1989 since the predominant Congress party would have no incentive to constrain its superior fund raising potential. The party-systemic changes that have been in progress since 1989 leading to the emergence of a still evolving multiparty system without a dominant party, have arguably created some of the enabling conditions for collective action on state funding. This is so for three reasons.

First, the cost of contesting elections has been rising inexorably. Second, while mounting election expenditures over the past three decades in a highly regulated economy may, at first glance, be expected to benefit the incumbent party, this has not been the case. This period has seen the decline of the predominant party system and an increasingly rapid turnover of incumbents. Therefore, mounting expenditures do not necessarily deliver victory while they do increase costs for politicians. The present system of political finance is an increasingly high cost, high risk proposition for politicians, creating incentives for the consideration of the state funding alternative.

Third, as party strengths are more balanced in a multiparty system, and victories are increasingly uncertain, two broad possibilities arise. One is that of intensified competition including a downward spiral of more and more recklessly competitive economic, religious, caste and regional populism. The other is that of collective action, including on the issue of introducing state funding of elections to reduce costs and risks for all parties (and large donors).

In the light of the foregoing analysis we would argue that comprehensive state funding of elections only, complemented by the limits on expenditure and reporting and disclosure requirements as in the fifth option, would greatly reduce though not eliminate the imperative for corrupt fund raising, and help democratize and make transparent the functioning of political parties. It would be the best of the options available.



It would also indirectly help to reduce the entry barriers to political contestation for potential candidates who would find it difficult to win party nominations due to lack of resources, and therefore contribute to more broad based political contestation than is now the case. The NEA ’99 study of the CSDS, to be released, finds a strong correlation between the wealth and income of candidates and their prospects for getting major party nomination.

Having outlined the collective action incentives for state funding it is important to ask what the collective action problems are. The main collective action problem, we argue, is the fact that while state funding will reduce risks and costs for party leaderships it will simultaneously reduce their power within their parties by forcing internal democracy and accountability.

Before coming to the issue of financing state funding, one would like to deal with the issue of company donations, as allowed currently under Section 293A (if not utilized because of company and politician aversion to transparency), particularly in the context of the recently floated proposals about making them tax deductible. This is flawed and damaging to democracy in the Indian context because it directly politicizes companies.



Nearly all important companies in India are dependent on central and/or state public financial institutions as lenders and/or shareholders, or buyers. Will these institutions’ representatives on boards be politically neutral between ruling and other parties when political donation proposals are to be cleared? What about the shareholders? Can managements and boards use corporate funds belonging to a diverse mass of shareholders to support any particular party or candidate? The basic point is that political contributions are not like any other business expenditure and that long term and unhealthy politicization of industry could take root.

There is, however, another way of raising a state fund without imposing a burden on the exchequer. Currently, the nearly 800 MPs of both houses of Parliament are entitled to Rs 2 crore annually for local area development expenditure in their constituencies, or close to Rs 8000 crore over a five year period. This scheme is wrong in principle and politically unfair. Wrong because it takes away some of the responsibility for development activity from both the state and local initiative and makes it a matter of individual patronage. It is politically unfair because it gives an advantage to the incumbent (of whatever party) over his rivals by giving him a discretionary expenditure purse of Rs 10 crore over a term. If this scheme is abolished and a part of the funds are used for state funding of elections, it could actually be a considerable net public saving, and would be the best way of financing state funding of elections.



* I thank V. B. Singh and Yogendra Yadav for associating me with the National Election Audit ’99 as co-coordinator, and many key leaders from major political parties and several industrialists and industry association officials who gave generously of their time and knowledge in confidence.

1. This paper is a shortened version, suitably updated, of my paper, ‘Toward State Funding of Elections in India? A Comparative Perspective on Possible Options’, Journal of Policy Reform 3(3), November 1999, which has the supporting references to the points made here.