Time to Institutionalise Funding of Political Parties

Cleaning up the system with a transparent mechanism for political funding. Credit: AJEnglish, FLickr CC BY 2.0

Cleaning up the system with a transparent mechanism for political funding. Credit: AJEnglish, FLickr CC BY 2.0

The question of how political parties in India should be funded is inextricably linked to corruption and black money generation. It is well known that companies executing big industrial projects take heavy loans from banks and part of this money goes to political parties as election funds. It is standard practice for companies taking loans from public sector banks to show inflated value of equipment imports from abroad and use this mechanism to create a corpus of cash in foreign tax havens. These funds come back to India from time to time to finance political parties. Currently Rs. 7.5 lakh crores are owed to public sector banks by well known corporate groups dealing with infrastructure and basic commodities like steel and metals. No government, whether UPA or NDA can really be very tough on these companies because they fund the political system on a significant scale. So what is the cure for this deep malaise in the system? The answer is to make funding of political parties totally transparent and above board. But how to do it?  A modest beginning can be made in this direction.

Recently, the Centre quietly absolved political parties, which were clearly in violation of Foreign Contribution (Regulation) Act 2010 (FCRA), by retrospectively amending the law, thus legitimising financial contributions to leading outfits like the BJP and Congress by companies of foreign origin, such as Vedanta. Incidentally, Vedanta is also named as one of the ten big companies owing money to PSU banks.  Vedanta’s case had become very controversial when the NDA government, after coming to power, began tightening the screws on several prominent NGOs for alleged violations of the FCRA law.

Many civil society activists had raised the issue of how Vedanta, a foreign company with Indian subsidiaries, could fund the BJP and Congress. The legality of political parties having formally received funds from the Indian subsidiaries of a foreign company like Vedanta was taken to the judiciary. A public interest litigation is also being heard  in the Supreme Court in this regard. In 2014, the Delhi High Court had held this to be violative of the-then FCRA law.

The Centre never really had an answer to the question of how major political parties received funds from global companies like Vedanta without the necessary FCRA clearances.  Finally, the government obliquely admitted to its guilt by retrospectively amending the FCRA law to legalise the contributions received by the BJP and Congress from Vedanta.

This simply means that Vedanta is free, and retrospectively so,to make contributions to the political parties without any FCRA clearance as long as its Indian subsidiary is registered under existing FDI and foreign exchange rules.

However, the retrospective amendment is bound to generate controversy as many related questions about foreign funding of political parties are now pending in the Supreme  Court. This could re-open yet again the nature of political funding that comes from the corporate world. Post globalisation, the lines between foreign company and its domestic subsidiary are getting ever so blurred. Maruti Automobiles or Hindustan Lever are very much local companies but foreign owned. So should they be allowed to fund political parties in a transparent manner? It is a tricky question. If a liberal case is made out, then one could possibly argue in favour of a clean, institutionalised system in which the State, not political parties, accepts funds by cheque from such companies.

The Supreme Court, which is looking at this question, could take this opportunity to direct the Centre to make funding of political parties totally transparent. One way of doing this is to direct the Centre to consider levying a cess or tax for the purpose of funding political parties and the elections. Even if a small tax of 0.5% of GDP is collected over five years from corporates and high net worth individual tax payers , it will create a corpus of Rs. 60,000 crores  which the Election Commission can administer as a constitutional body.

Indeed, if the Election Commission is made the authority to administer political funding on the basis of transparent rules then political parties need not directly tap corporates for big funding which is invariably based on a quid pro quo. If all funding is made official, then the role of black money will also be minimised, if not totally eliminated. This may be a good start. If the Election Commission is made the authority for administering such a fund then there is no harm in letting Indian subsidiaries of foreign companies to contribute to such a corpus which will be strictly regulated by the EC. Indeed, it is dangerous to allow these companies to directly fund political parties because there will be scope for one-to-one deal making. However, if such funds are put in a common pool which is controlled and regulated by the EC, direct deal making between big companies and political parties will be minimised. This by itself would be a major reform which might help clean the rotten system of political funding that we have today.