The costs of democracy

Corruption in India is driven by flaws in political party funding and election expenditure laws

To combat corruption, we must attack its root causes. Our research (available at bit.ly/GowdaSridharan2012) suggests that corruption in India is driven by flaws in political party funding and election expenditure laws.

Healthy competition between political parties is a prerequisite for a vibrant democracy. Parties need funds to function and to campaign. But where do such funds come from? How are they spent? Are there larger implications of how India addresses these questions?

Historically, parties raised funds openly and legally from corporate donors and small contributions from members, something Mahatma Gandhi was adept at, as Ashutosh Varshney reminds us in his column in this newspaper (‘The business-politics nexus’, IE, July 9). However, in the late 1960s, corporate donations were banned without being substituted by alternative legal sources, for example state funding. The demand for funds required to run parties and fight elections was addressed by shaking down corporate donors for unaccounted “black” money.

On the supply side, corporate donors were willing to contribute black money in exchange for licences and permits. Two decades after liberalisation, the same corrupt equilibrium prevails because governments still control key aspects of resource allocation (for instance, spectrum and land). Discretionary allocation of such resources helps those in power raise funds and those who contribute to get ahead of their competition.

Turning to election expenditure, a possible desire to create an open, level electoral playing field translated into low spending limits. Candidates caught transgressing these limits faced disqualification. Unrealistic limits led candidates to under-declare their expenditures (leading Atal Bihari Vajpayee to declare that all members of Parliament were forced to begin their careers with a lie!). This also created a demand for black money rather than legal sources of funds.

In 1974, the Supreme Court ruled that party election expenditures were to be counted towards candidates’ expenditures. Parliament overturned this ruling by amending the Representation of the People Act, effectively removing the ceiling on election expenses, which then grew substantially. Periodic attempts, such as the Dinesh Goswami and Indrajit Gupta Committee reports, to provide partial state funding of election expenses did not go far, but had some impact by reducing the campaign period from 21 to 14 days (from 1996), marginally increasing expenditure ceilings and providing parties with air time on government electronic media.

In 1985, corporate contributions to political parties were re-legalised and from 2003, made tax-deductible. Parties were now required to file income tax returns disclosing their sources of income, except for contributions below Rs 20,000.

Renewed legality and tax deductibility of corporate contributions has not resulted in a deluge of open giving. This is because elections witness a substantial turnover of parties in power. Corporate donors reason that they are better off contributing to parties covertly so as to avoid adverse impacts when a non-favoured party wins the election. Anonymity trumps tax-deductibility.

Parties continue to garner significant resources through contributions below Rs 20,000 from unidentified donors, raising questions over whether this represents black money being channelled into party coffers, rather than donations from loyalists. Parties’ income tax declarations, now publicly available thanks to the Right to Information Act, show that in 2008-09 the Congress raised Rs 480 million in donations out of an income of Rs 4970 million, and the Bharatiya Janata Party raised Rs 1960 million in donations out of an income of Rs 2200 million. Donations below Rs 20,000 constituted Rs 201 million and Rs 1654 million respectively.

The Election Commission’s aggressive monitoring of overt election expenses also has perverse consequences. Expenditure has simply been driven underground. Candidates can no longer spend lavishly on shows of support like mass rallies. So candidates now simply pay cash to voters. Elections typically trigger a covert spending arms race. “Paid news” is one of the fallouts.

Electoral finance laws also lead parties to seek out wealthy candidates, or those with the capacity to raise and distribute significant amounts of black money (thus increasing the chances of criminals obtaining party tickets). Wealthier candidates are more successful. According to National Election Watch, in 2009, of 322 candidates who declared assets greater than Rs 50 million, one-third emerged victorious, whereas only 19 per cent of candidates with assets between Rs 5 and 50 million triumphed.

While more spending does not guarantee victory, the only detailed examination of actual election expenses by the Centre for the Study of Developing Societies in 1999 suggests that candidates need to spend above a minimum threshold to be competitive. Winners and runners-up in 1999 spent an estimated average of Rs 8.3 million and Rs 6.8 million respectively, far above the then expenditure limit of Rs 1.5 million.

Black money’s dominance also affects real sectors of the economy. Devesh Kapur and Milan Vaishnav demonstrate the existence of a “political-business cycle” in the construction industry, with activity slowing down during elections, possibly because funds are diverted to campaigns.

There is another, larger impact of election finance laws: Black money flows to key individuals who are likely to come to power. Once in power, these individuals raise more resources through preferential allocation of governmental favours to the private sector. Their stranglehold over funds enables them to favour supporters and marginalise competitors, helping them gain dominance over their parties. Such individuals typically rely on family members to manage their treasure chests, a factor leading to the emergence of political dynasties across party lines.

State funding is a potential solution to India’s electoral ills. The Confederation of Indian Industry had recommended raising money through corporate contributions to a state-managed fund or a cess on excise duty. Yogendra Yadav recommends that government allocate Rs 100 per vote polled to constituency units of parties, to be used for legitimate political expenses. This would cost the exchequer less than the Member of Parliament Local Area Development Scheme, while helping level the electoral playing field.

We recommend that parties be given matching funds in proportion to the amounts they raise from identified small contributors and after demonstrating mandatory internal democracy. (This model has worked well in continental western Europe). We also recommend the simultaneous removal of election expenditure limits to bring spending overground and to end a counterproductive charade. Only when we come to terms with the actual costs of making democracy work will we take the first steps towards a cleaner public sphere.

M. V. Rajeev Gowda is chairperson, Centre for Public Policy, IIM Bangalore. E. Sridharan is academic director, University of Pennsylvania Institute for the Advanced Study of India

Courtesy: http://www.indianexpress.com

Read more:  http://www.indianexpress.com/news/the-costs-of-democracy/976243/0

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