POLITICAL FUNDING IN INDIA: CHALLENGES AND WAY FORWARD

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Context

Lack of transparency in political funding, driven by large corporate donations favoring ruling parties, causes inequity and a "quid pro quo" crisis.

Read all about: WHY NEED ELECTORAL REFORM IN INDIA l REGISTERED UNRECOGNISED POLITICAL PARTIES l WHY DYNASTIC POLITICS REMAINS DEEPLY ROOTED IN INDIA l INDIA'S POLITICAL FUNDING REGULATION STRUGGLES

What is Political Funding?

Political funding refers to the methods through which political parties raise money for their election campaigns and general activities. 

Fair and transparent funding is crucial for a healthy democracy as it directly impacts electoral competition, policy formulation, and public trust in the political system. 

Opaque funding mechanisms can lead to corruption and cronyism, undermining the principle of 'free and fair elections'.

Legal Frameworks Governing Political Funding

Representation of the People Act (RPA), 1951

Section 29B: Allows registered political parties to accept voluntary contributions from any person or company, except a Government company or a foreign source.

Section 29C: Mandates that parties must report all contributions above ₹20,000 to the Election Commission of India (ECI) annually.

Income Tax Act, 1961

Section 13A: Grants 100% tax exemption to political parties on their income from house property, voluntary contributions, and capital gains, provided they maintain audited accounts and report donations over ₹20,000.

Anonymous cash donations are restricted to a maximum of ₹2,000.

Section 80GGB/80GGC: Allows 100% tax deduction for companies and individuals, on contributions made to political parties through any means other than cash.

Companies Act, 2013

Section 182: Following the scrapping of electoral bonds, the original provisions are reinstated. Companies can contribute up to 7.5% of their average net profits of the preceding three financial years.

Companies must disclose the total amount contributed and the name of the recipient political party in their Profit & Loss statements.

Foreign Contribution (Regulation) Act (FCRA), 2010

Broadly prohibits political parties from accepting any foreign contributions.

An amendment allowed donations from Indian subsidiaries of foreign companies, which was a point of contention.

What are the Challenges in Political Funding System

Electoral Bonds Scheme (Now Scrapped)

• Introduced in 2018, the Electoral Bonds scheme allowed individuals and corporations to donate money to political parties anonymously.
• In February 2024, the Supreme Court struck down the scheme as unconstitutional. The court ruled that the anonymity of the scheme violated the citizens' Right to Information (Article 19(1)(a)), which is essential for holding political parties accountable.

Influence of Corporate Funding

• Distortion of Level Playing Field: Anonymous corporate funding creates imbalance, favoring larger, established parties and making it difficult for smaller parties to compete effectively.
• Rise of Shell Companies: Lack of transparency and caps promote the use of shell companies to channel illicit funds to political parties, concealing the true source of money.

Problem of Black Money

• High Cash Expenditure: Despite official expenditure limits, a large amount of unaccounted cash is spent during election campaigns for rallies, voter inducements, and other illicit activities.
• Candidate Expenditure Limits: The ECI has set expenditure limits for candidates. For Lok Sabha elections, the limit is ₹95 lakh for larger states and ₹75 lakh for smaller states. However, there is no limit on the expenditure by political parties.
• Weak Enforcement: The ECI has limited capacity to track and curb the flow of cash during elections, making the official limits largely ineffective.

Persistent "Unknown Sources" of Income

Despite the ban on electoral bonds, a large portion of political funding remains untraceable. Key loopholes contributing to this are:

• Donations below ₹20,000: Political parties are not required to disclose the identity of individuals or organizations donating less than ₹20,000. This allows for large sums to be funneled through multiple small transactions.
• Income Statistics: In the Financial Year 2022-23, over 59% of the total income declared by six national parties came from unknown sources. Electoral bonds accounted for over 82% of this unknown income before they were scrapped. (Source: ADR)

Rise of Electoral Trusts

Following the ban on electoral bonds, Electoral Trusts have become a major channel for corporate donations. While they offer more transparency than bonds, challenges remain in tracking which specific company's funds go to which party.

• Donations to electoral trusts surged to ₹3,811 crore in FY 2024-25.
• Three main trusts—Prudent, Progressive, and New Democratic—accounted for nearly 98% of these contributions.
• The Prudent Electoral Trust alone handled over ₹2,600 crore, directing approximately 82% of its funds to the ruling BJP (Source: The Times of India).

Escalating Election Costs and Illicit Funding

Rising election costs fuel the need for "black" money among candidates and parties.

• The 2024 Lok Sabha election is estimated to be the most expensive in the world, with total spending projected at approximately ₹1.35 lakh crore (Source: Centre for Media Studies). 
• This massive expenditure far exceeds the official spending limits, indicating a substantial flow of illicit funds into the electoral process.

Distorted Electoral Playing Field

Financial gaps between major and smaller parties, and wealthy and ordinary candidates, compromise free and fair elections.

• Advantage to Wealthy Candidates: Financial strength is correlated with electoral success, creating an entry barrier for candidates with limited resources.
• Concentration of Funds: Ability of larger parties, particularly the ruling party, to raise more funds provides them with a disproportionate advantage in campaigning, advertising, and voter outreach, creating an uneven competitive landscape.

Global Best Practices in Political Funding

India can draw lessons from various democratic models worldwide to create a hybrid system suited to its own needs.

Country	Key Features of Funding Model
Germany	Partial State Funding: Public funds are allocated based on a party's vote share and the amount of private donations it raises. Strict Disclosure: Donations exceeding €50,000 must be reported immediately. All donations over €10,000 must be named in annual reports (Source: Bundestag). Corporate Donations: Allowed but must be transparently declared.
United Kingdom	No Donation Cap: There are no limits on the amount an individual or entity can donate. Permissible Donors: Donations are only accepted from permissible sources, such as individuals on the UK electoral roll or UK-registered companies. Spending Caps: Strict limits on campaign expenditure for political parties during the election period. Disclosure Threshold: Donations above £11,180 to a central party must be reported to the Electoral Commission (Source: UK Electoral Commission).
USA	Contribution Limits: Strict limits on contributions from individuals and Political Action Committees (PACs) to candidates. For the 2023-24 cycle, individuals were limited to $3,300 per candidate per election (Source: Federal Election Commission). Mandatory Disclosure: All contributions over $200 must be disclosed with the donor's name, address, and employer. Super PACs: Following the Citizens United ruling, "Super PACs" can raise unlimited funds but cannot donate directly to or coordinate with candidates.

Way Forward

Enhancing Transparency and Accountability

Disclosure Obligations

Mandate full public disclosure of all individual and corporate political contributions to candidates and parties. Donors and recipients must report complete details (names, addresses, PANs) to the ECI and Income Tax authorities.

Digital and Real-Time Disclosure

All political donations, regardless of the amount, should be made through digital means and disclosed on a public portal in real-time.

Strengthening Audits

The accounts of political parties should be audited by a panel of auditors approved by the Comptroller and Auditor General (CAG) to ensure impartiality and thoroughness.

Partial State Funding of Elections

Indrajit Gupta Committee (1998)

This committee endorsed partial state funding, recommending it be provided in-kind (e.g., free airtime, fuel, office space) to recognised national and state parties to create a level playing field.

Law Commission's 255th Report (2015)

While not recommending full state funding due to fiscal constraints, it strongly advocated for comprehensive legal reforms to regulate party finances as a prerequisite.

Rationale

Partial state funding can reduce parties' dependence on private corporate donors and curb the use of black money.

Legal and Institutional Reforms

National Election Fund

As suggested by former Chief Election Commissioner S.Y. Quraishi and endorsed by bodies like the Law Commission, a National Electoral Fund could be established where all donors contribute. 

Funds would be allocated to parties based on their electoral performance, ensuring donor anonymity from parties but not from the public.

Expenditure Cap for Parties

Impose a ceiling on the election expenditure of political parties, similar to the limit on candidates.

Empower the ECI

Grant the ECI powers to de-register political parties for persistent non-compliance with financial disclosure norms.

Conclusion

The Supreme Court's verdict striking down Electoral Bonds mandates urgent systemic electoral reform, shifting from opacity to transparency and accountability. Combining robust disclosure, partial state funding, and strict ECI enforcement is essential to safeguard electoral integrity and restore public trust.

Source: INDIAN EXPRESS

PRACTICE QUESTION Q. In the context of ensuring a level playing field, critically evaluate the proposal for state funding of elections in India. 150 words