Black money, poll funding: tackling intertwined issues

On November 8, 2016, the central government demonetised 86% of the total Indian currency in circulation then, worth Rs 15.4 lakh crore. This landmark decision was aimed at attacking corruption and tackling the black money menace, which has been a longstanding challenge for the country. Demonetisation, in fact, was just another step in a series of initiatives taken since 1946.

The government has been enforcing corrective measures, ranging from Voluntary Disclosure Schemes and policy reforms to setting up of institutional bodies for improving accountability and transparency. But all with limited success, because despite these initiatives, the amount of black money in India has rapidly increased from Rs 600 crore (6% of GNP, Kaldor Report) in 1956 to Rs 37,000 crore (20% of GDP, NIPFP estimate) in 1985, and around 30% of GDP according to estimates in recent years.

Unaccounted money is detrimental to economic growth and assumes urgency when more than 66% of the population below 30 years is seeking employment opportunities. Therefore, the government has been making efforts to address corruption on an urgent basis. Finance Minister Arun Jaitley had suggested need for reform in electoral funding in February 2017 and recently initiated discussion on electoral bonds. These 15 day-validity bearer bonds are meant to bring in more accountability as their value will need to be disclosed to the Election Commission by their beneficiaries. But they cover the donors in a veil of secrecy and anonymity, essentially taking a step back from their intended goal of increased transparency. As a result, electoral bonds suffer from similar challenges as with cash funding of elections.

In multi-country research, it is interesting to find that other countries passing through similar critical phases of corruption had successfully used various measures to curb the influence of unaccounted money in political funding. Some of these are:

a) Restrictions on poll spends, contributions: With the enactment of the Federal Election Campaign Act (FECA), 1971, the US established a comprehensive system of electoral funding regulation and enforcement by placing strict limits on contributions to individuals and parties, and also on permissible expenditures for electoral campaigns by political parties. While similar restrictions exist in India on the size of contributions, the cap on political expenditure per candidate at its current level of Rs 70 lakh seems much lower than the actual expenditure. In addition, there may also be a need to enforce a similar cap, as in the US, on spending by political parties.

b) Greater visibility in reporting: A key highlight of FECA in the US was the mandatory disclosure of all political contributions above $200 to the Federal Election Commission, an independent watchdog for enforcing electoral funding compliance. All the contributions are available online for public review and monitoring, ensuring maximum transparency in the system. In India, political parties are mandated to disclose all income sources above Rs 20,000, but only to the Election Commission of India.

c) State or crowd-funding: Introducing donation and expenditure caps would make it imperative for political parties to search for alternative ways of funding. One such could be for parties to try to source crowd-funding, as was done by Barack Obama in the 2008 and 2012 US presidential elections. This would ensure that no vested interests are backing the government.

A more widespread and popular model would be for the state to provide some form of funding or subsidies. This could take the form of a fixed amount of free media broadcasting, a certain number of free poll-related communications, free use of certain state infrastructure like the space of government schools as in the UK, etc. This would promote equality among parties and ensure that elections do not become a funding race. The mainland European practice of states giving out cash to political parties would not be as suitable for India, given the country's low tax-to-GDP ratio, and consequently low affordability by the government.

d) Poll funding watchdog: Given the frequency and intensity of the election process in India at the national and state levels, the already burdened Election Commission should not be saddled with added responsibility of monitoring electoral funding. Drawing parallels to the Federal Election Commission in the US, the country may like to consider setting up an independent and autonomous regulatory body to monitor political funding in the country and ensure effective policy execution across all electoral levels.

e) Voluntary Disclosure Schemes: In a country where the most conservative estimates of unaccounted money are pegged at nearly one-third of GDP, amnesty schemes have miserably failed in the past. This is despite having tried a variety of amnesty schemes ranging from concessional VDS to Bearer and Gold Bonds. But demonetisation has now changed the backdrop against which future amnesty schemes could be implemented.

The government now has updated and more robust records of individuals suspected of money laundering, laying open the possibility of targeting VDS at specific individuals. Such schemes have already seen considerable success in the US and UK and would provide a perfect opportunity for launderers to come clean in a system that is getting increasingly transparent and digitised.

A parallel shadow economy increases distrust among citizens while putting undue pressure on honest tax-paying individuals. Any attack on the underground economy automatically translates to a broader tax base and higher tax revenues for the government. The initiatives suggested above can help the country raise higher reserves after plugging the leaks, and redeem its wealth, currently being wasted in underground coffers.

(Prof Charan Singh is Visiting Faculty, IIM-Bangalore; Manas Khanna and Kartik Mittal are Post-Graduate Programme students at IIM-B, working on 'Implications of Demonetisation' under Prof Singh's mentorship)