Politics and Black Money

Amidst all the brouhaha about demonetisation, the issue of curtailing the deployment of black money by politicians for funding election campaigns appears to have been sidelined. That illegal funds are used by political parties and their candidates standing for elections is hardly a secret. In fact it is often contended—and rightly so—that the politics–business–crime nexus which is facilitated by the use of black money in elections represents the fountainhead of corruption in the country or, to use an Indian analogy, the Gangotri of graft. When unscrupulous business persons or criminals “invest” in a politician, they expect a “return” on their investments which, in turn, invariably vitiates the working of the political economy by injecting corruption into the system. None of this is new or for that matter unique to this country. But one should be wary of claims about demonetisation cleansing the country of corruption by drastically curbing the use of black money by politicians. Still, there could be some basis for speculation that the 8 November decision to withdraw high-denomination currency notes from circulation was aimed at hurting the political opponents of the Bharatiya Janata Party (BJP) before the Uttar Pradesh elections.

Within days of the demonetisation decision, Chief Election Commissioner Nasim Zaidi wrote to the government calling for a slew of electoral reforms that could, among other things, curtail the use of black money in elections. He argued that bribery and “paid news” be made cognisable offences. He suggested that the Election Commission of India (ECI) be given powers to deregister political parties. At present, out of the 1,900-odd registered political parties in the country, barely 400 have put up candidates who have contested elections over the past decade or so. Given that parties registered with the ECI are granted exemption from payment of income tax on donations received, it is well known that innumerable dummy political parties have been set up primarily to launder black money. Zaidi urged the government to accept the recommendation made by the Law Commission in 2015 that only a fifth of the total income of a party or ₹20 crore (whichever is lower) be allowed in the form of anonymous donations. At present, a political party is exempt from declaring the source of a donation, provided it is less than ₹20,000 as per the provisions of the Income Tax Act. Political parties choose “friendly” auditors to approve their books of account. A huge loophole in the law is that while there is a ceiling on the amount that can be spent by a candidate on election campaigning, no such limit applies to a political party. Other recommendations made by the Law Commission and the ECI have been placed in cold storage; in bureaucratic parlance, these suggestions are being “examined” by a task force in the law ministry.

One of the most blatant examples of bending the law to legalise particular kinds of donations to political parties came in the Finance Act of 2016. Finance Minister Arun Jaitley quietly inserted a clause to retrospectively amend Section 23(1) of the Foreign Contribution (Regulation) Act (FCRA) to change the definition of an “Indian” company to include a corporate entity in which foreign shareholding is within the limits specified by the government. Why was this done? In March 2014, just before the general elections, the Delhi High Court had declared illegal donations given to the BJP and the Congress by “foreign sources,” in this case, companies associated with the Vedanta/Sterlite/Sesa Goa mining and metals conglomerate headed by Anil Agarwal. Before it was amended, the FCRA included in its definition of a “foreign source” a corporate entity in which foreign shareholdings exceeded 50%.

Even as the current BJP government as well as the earlier Congress-led one have tightened norms for receiving foreign funds that are applicable to non-governmental organisations, the country’s two largest political parties came together to withdraw their petitions filed in the Supreme Court challenging the order of the Delhi High Court declaring illegal the donations they had received from the Vedanta Group in a case that had been initiated by the Association for Democratic Reforms. The same representatives of the BJP and the Congress who were most upset about the retrospective amendment to the Income Tax Act in the Vodafone case did not utter a murmur of protest when the FCRA was amended with effect from September 2010 when the relevant law came into force. It should also be noted that the FCRA was amended through a money bill, although the act is administered by the Ministry of Home Affairs, not the Ministry of Finance.

More than a week after his momentous demonetisation decision, Prime Minister Narendra Modi proposed state funding of elections and the simultaneous holding of elections to the Lok Sabha and state legislative assemblies in order to cut costs and to reduce the use of black money in elections. This is not the first time these suggestions have been made. In 1998, a committee headed by former Union Home Minister Indrajit Gupta had recommended that elections be partially funded by the government as is the case in certain countries. Similar suggestions had been made in 1999 by the Law Commission and in 2008 by the Administrative Reforms Commission. The Government of India already bears particular election-related expenses incurred by political parties in the form of free broadcasting facilities provided by the state-owned Doordarshan and All India Radio. But state funding of elections will not eliminate the use of black money in elections nor reduce the incidence of corruption unless such moves are accompanied by many changes in extant laws and rules relating to the funding and functioning of political parties.