Expert Explains | Regulating political funding: Rules around the world, India’s challenge

The question of the funding of political parties goes to the heart of India’s democracy. In the United States, elections revolve around the campaign machinery of individual candidates. But in India, like in most other parliamentary systems, parties are central to electoral politics. Thus, the primary focus of the campaign finance framework in India needs to be parties, not individual candidates.

A fruitful party funding framework must give attention to at least four key aspects — regulation of donations, expenditure limits, public financing, and disclosure requirements.

Regulation of donations

Some individuals or organisations, for instance, foreign citizens or companies, may be banned from making donations. There may also be donation limits, aimed at ensuring that a party is not captured by a few large donors — whether individuals, corporations, or civil society organisations.

Some jurisdictions rely on contribution limits for regulating the influence of money in politics. US federal law imposes different contribution limits on different types of donors. Some other countries, such as the UK, do not impose contribution limits, but instead, rely on expenditure limits.

Limits on expenditure

Expenditure limits safeguard politics from a financial arms race. They relieve parties from the pressure of competing for money even before they start to compete for votes.

Therefore, some jurisdictions impose an expenditure limit on political parties. For example, in the UK, political parties are not allowed to spend more than £30,000 (about Rs 30 lakh) per seat.

In the US, the Supreme Court’s expansive interpretation of the First Amendment (freedom of expression) has come in the way of legislative attempts at imposing expenditure limits.

Public financing of elections

Many countries provide public funding of parties.

The most commonly used method is to set predetermined criteria. For instance, in Germany, parties receive public funds on the basis of their importance within the political system. Generally, this is measured on the basis of the votes they received in past elections, membership fees, and the donations received from private sources. German “political party foundations” receive special state funding dedicated to their work as party-affiliated policy think tanks.

A relatively recent experiment in public funding is that of “democracy vouchers”, which is used in local elections in Seattle, US. The government distributes a certain number of vouchers — each of which is worth a certain amount — to eligible voters. Voters can use these vouchers to donate to the candidate of their choice. The voucher is publicly funded, but the decision to allocate the money is the individual voter’s. Put simply, voters get to “vote” with their money before they cast their ballot.

However, some recent studies have pointed out that this system may promote more extremist candidates. More generally, one of the problems with public funding is that unless a decision is taken to ban private funding altogether (which is difficult in India), public funding only tops up party funds — it does not address the challenge of regulating private money.

Disclosure requirements

This aspect of the regulation of private money in politics formed the crux of the Electoral Bonds case.

Disclosure requirements do not outrightly prevent parties or donors from receiving or making donations. Instead, disclosures nudge voters against electing politicians who have used or are likely to use their public office for quid pro quo arrangements. As such, disclosures may discourage parties from using public office to benefit their donors.

Disclosure as regulation rests on an assumption that the information supply and public scrutiny may influence politicians’ decisions and the electorate’s votes. However, mandatory disclosure of donations to parties is not always desirable.

At times, donor anonymity serves a useful purpose of protecting donors. For instance, donors may face the fear of retribution or extortion by the parties in power. The threat of retaliation may, in turn, deter donors from donating money to parties of their liking.

Many jurisdictions have struggled with striking an appropriate balance between the two legitimate concerns — transparency and anonymity. This issue was addressed by the Supreme Court in its judgment.

The Chilean experiment

Is it possible to reap the benefits of anonymity and still prevent quid pro quo arrangements? An experiment in Chile sought to ensure “complete anonymity” of party funding.

Under the Chilean system of “reserved contributions”, donors could transfer to the Chilean Electoral Service the money they wished to donate to parties, and the Electoral Service would then forward the sum to the party without revealing the donor’s identity.

If the complete anonymity system worked perfectly, the political party would not be able to ascertain the sum donated by any specific donor — and would find it extremely difficult to strike quid pro quo arrangements.

However, it would be in the interest of donors (who want government patronage) and parties (who need money) to informally coordinate in advance to ascertain the sums donated by those donors. Indeed, as various scandals revealed in 2014-15, Chilean politicians and donors had coordinated with each other to effectively erode the system of complete anonymity.

Balancing transparency, anonymity

The most prominent response, then, is to balance legitimate public interests in transparency and anonymity. Many jurisdictions strike this balance by allowing anonymity for small donors, while requiring disclosures of large donations. In the UK, a party needs to report donations received from a single source amounting to a total of more than £7,500 in a calendar year. The analogous limit in Germany is €10,000.

The argument in favour of this approach is: small donors are likely to be the least influential in the government and most vulnerable to partisan victimisation, while large donors are more likely to strike quid pro quo arrangements with parties.

In India, there are no donation limits on individuals. There is also no legal expenditure limit on parties; a party can spend as much as it wants for its campaign as long as this expenditure is not for the election of any specific candidate. The Electoral Bonds Scheme enabled large donors to hide their donations if they used official banking channels.

Also, Indian electioneering is no longer restricted to parties and candidates. Over the last decade, there has been a staggering rise in the involvement of political consultancies, campaign groups, and civil society organisations in online and offline political campaigns. In the US, the relatively lax regulation of third-party expenditure has pushed a large amount of political money to shadow campaigns that influence political outcomes, but often fall outside of the traditional objects of regulation of campaign finance. This should prompt a rethink of the older assumptions about Indian politics, which form the basis of India’s political funding framework.