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Electoral and Party Finance Reform

E. Sridharan
September 27, 2009

Parties in India raise money for both elections and inter-election purposes through private donations, the bulk of which are believed to be unaccounted for despite recent incentives for transparency in the Election and Other Related Laws (Amendment) Act of 2003, which introduced tax-deductibility for political donations against receipts. While parties are tax-exempt, they have to file income tax returns. However, these declarations are thought to be understatements. There is no state funding except for free time on the state-owned media on a basic slab-plus-pro rata time based on past electoral performance. Membership dues are a marginal source of party funds, the bulk of which are believed to be kickbacks for government clearances or contracts at both Central and State levels. Pre-election donations by large manufacturing and, increasingly, real estate businesses are again, goodwill bought in advance. Hence, there is a powerful nexus of interested money and parties at both Central and State levels, with the pattern being remarkably similar across parties with the exception of the Left parties.

Election expenditure limits – 2.5 million rupees per candidate in a constituency in 2009 – were farcical because they applied to candidates only, exempting parties and independent supporters under Explanation 1 of Section 77(1) of the Representation of the People Act. Even with the steady tightening of reporting requirements and the amendment of Section 77(1) to exempt fewer categories of party expenditure from candidates’ spending limits, there are still huge loopholes. Hence there are no fundamental changes in party or donor incentives and therefore, the pattern of fund-raising. Even the 2003 law has not drastically changed the under-the-table pattern of party funding because the potential costs and risks of transparency largely outweigh any tax benefits. In a still fairly discretionarily regulated economy, transparent donors run the risk of being penalized by parties in power at the state or center that are unhappy with who and in what amounts a company donates funds. However, the 2003 introduction of tax-deductibility has, to a partial and limited extent, incentivized transparent payments by companies and individuals. From fiscal years 2003-04 and onward, payments are listed on the Election Commission of India’s Web site for amounts over twenty thousand rupees which have to be disclosed by parties to the Commission.

Traditionally, there have been three drivers of political finance reform worldwide: corruption scandals (like those in East Asia), rising campaign costs, and concern about equality of opportunity for political participation (hence, a felt need to level the electoral playing field). In India, corruption and campaign costs can be possible drivers of reform, as can the rise of an attentive middle class, civil society and media that might want to correct the skew in favor of the very rich. Another potentially important incentive for politicians to reform the system is the fact that over the past ten years, anti-incumbency has been relatively high at both state and national levels. Increased election spending does not necessarily lead to electoral victories while increased spending combined with effective delivery on anti-poverty and employment generation programs, as well on public services, infrastructure (education, health, roads, water supply, electricity, etc.), and governance are perceived to bring electoral rewards. Hence, corruption that derails effective public service delivery and infrastructure development can actually be electorally negative, providing incentives for politicians to clean up the system. For the first time, India is in a situation where parties actually have at least some incentive to move towards a clean and transparent party funding system, which in turn will reinforce the tax incentives of donors.

Broadly speaking, there are two paths towards this goal, which are not mutually incompatible: State subsidies for parties for elections and for inter-election activities, and reforms to incentivize small donations from large numbers of donors. The latter would reduce dependence on interested big money and in the process, broad-base and democratize participation in the affairs of parties.

State funding of elections or parties, as in much of Western Europe, can be one of direct and/or indirect public subsidies – the latter being tax credits, free media time on state media, etc. – to parties combined with fairly strong regulations on intra-party governance, transparency (including disclosure of donor identities combined with tax incentives for small donors), accountability of public and party funds with less strict regulations on other donations, and expenditures, including allowing non-electoral expenditures. From the point of view of ensuring transparency and checking corrupt deals, state funding can be used as a lever to enforce a degree of intra-party democracy. In some countries like Germany, public funding is on a matching grant basis with the ceiling for public subsidies being the party income from private donations, to ensure the independent viability of parties.

Private funding reforms can complement state subsidies. Some countries – notably Canada, Germany, France and Sweden – have incentivized large-scale shifts in the sources of party funding from large private donors to large numbers of small donors and membership fees by instituting tax incentives for such small donations only. This has made parties shift to small donations and membership expansion in combination with state subsidies to parties in some countries, and has improved intra-party democracy, increased rank-and-file participation, and reduced corruption. Thus, a mutually reinforcing balance can be struck between state funding and private funding that reinforces transparency and intra-party democracy and reduces the corrupt and policy-capturing nexus with interested money.

A possible reform package for India, drawing upon these experiences, could consist of the following: First, either abolish expenditure, as it is meaningless to cap candidate spending while allowing huge loopholes for party and supporter spending, or include all of the latter spending under raised ceilings.

Second, state funding, as much in kind as possible to reduce fungibility and hence diversion, can be provided to parties on a basic slab-plus vote share-plus matching grant – against legally raised private donations – basis; the first two criteria being analogous to the provision of free time on the state-owned electronic media. The matching grant component could be fine-tuned to match only small, non-corporate donations to encourage broad-basing of financial support and membership dues. Hence, grassroots participation within parties and consequently greater intra-party democracy could be attained. Disclosure of donor identities and amounts should be mandatory and companies which are significant government contractors should be barred. At current per capita income levels, even one hundred rupees (the equivalent of two U.S. dollars) – per annum from three million dues-paying members – realistic for the two major national parties – would yield three hundred million rupees per year. This figure could be doubled by matching state funding. Thus, a combination of changes in private funding rules and state funding could ensure an adequate flow of funds for parties for both elections and inter-election purposes. Eligible corporate donations under the 2003 amendments –usually pre-election – even if not matched, would also contribute to transparency and intra-party democracy. State funding could, in principle, be financed by abolishing the current Member of Parliament Local Area Development Scheme (MPLADS) under which each parliament member gets twenty million rupees in local development funds a year. This scheme skews development policy by making local development a matter of potentially politically-biased patronage by the individual parliament member, and also skews the electoral playing field in favor of incumbents.

Third, the state could use the lever of state funding to impose internal democracy, accountability, and disclosure requirements on the functioning of political parties.

Taken together, these measures could reform party finance to reduce corruption and conduce to intra-party democracy and grassroots participation in ways that will make India’s democracy healthier. Such a reform package will have to be debated and periodically adjusted to refine and remove possible perverse incentives due to unanticipated side effects.

E. Sridharan is the Academic Director of the University of Pennsylvania Institute for the Advanced Study of India (UPIASI) in New Delhi, India.He can be reached at


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