Driving Black Money Out Of Politics, Step By Step 

This piece was written a few days before the presentation of the Budget and is a part of our February 2017 print issue.

The withdrawal of the old Rs 500 and Rs 1,000 currency notes has been the single-most disruptive economic move since the reforms of 1991. It has been extremely controversial, but not because of popular outrage. In fact, the public reaction to it has been overwhelmingly the opposite, something that much of the mainstream media acknowledged rather belatedly, not to mention grudgingly.

Opponents of this remonetisation have directed their ire at many aspects of it, with arguments that range from valid questions to hysterical denouncements. A valid and important aspect of the debate is what effect it will have on illicit “black” money, especially considering that the nation’s politics runs largely on such funds.

Even supporters of remonetisation will agree that it could at most facilitate one-time flushing out of unaccounted money. In fact, considering the larger-than-expected amount in old notes that has reportedly been deposited in banks, the extent of this initial success will itself depend on follow-up action by tax and investigative authorities, to catch and freeze illicit deposits.

Sure, the regeneration of black money will be harder now in comparison to earlier instances of remonetisation. The increasing requirement of PAN cards and Aadhaar, growth of the digital and cashless economy, and the electronic traceability that all these facilitate, will create more hurdles for black money than earlier. However, checking large-scale regeneration of black money will need more fundamental reform.

And nowhere is that more desperately needed than in the manner in which our politics is funded. Under-the-table political funding is facilitated by vast sums of black money generated from sectors like real estate, mining and for-profit education, to name only a few. There are quid pro quos involved, of course, leading to a vicious cycle of patronage and tolerance of illegality. Cleaning up political funding would have positive ramifications far beyond politics itself.

The basic problem with our rules on political funding, as in so many other areas, is that they evolved in a post-Independence era overflowing with idealism -- a good thing, of course -- but without the necessary tempering of pragmatism that is crucial. The end result is that the idealism has remained on the surface, still touted superficially, while the reality has transformed into barely-disguised cynicism and hypocrisy.

The idealism in this case was, and is, contempt for the role of money in politics. Tempering it with pragmatism would have recognised the necessity of money to run campaigns, but shifted the emphasis to the legitimacy of political funds and the creation of a level playing field for the role of money.

Without that infusion of pragmatism, the rules have focused on expenditure caps in election campaigns that for decades remained too artificially low to be realistic.

Even today, though the caps have seen regular and significant increases, the bitter competitiveness of democratic contests provides enormous incentives to flout them. As a result, all that we have achieved is to push campaign expenditure under the carpet, and turned it into the biggest magnet for black money.

Similarly, we can no longer fool ourselves by pretending that campaign expenditure caps somehow aid less well-off candidates against wealthier opponents. Sadly, we have achieved the worst of all situations, where virtually all candidates use black money, with wealthier ones obviously getting undue advantages by having more of it. The underlying systemic incentives and controls need rebooting.

Lessons from other democracies should also be instructive. Take the United States, for instance. In 2008, the relatively-unknown minority candidate, Barack Obama, outspent far wealthier, better-organised and long-established opponents. He was not wealthy himself, but was able to do this because he raised a huge war chest via small donations from the millions of supporters whom he enthused.

It is also clear that while money is a necessary ingredient for modern campaigns, it is far from sufficient by itself. Though Donald Trump is the first billionaire to have ever won the United States Presidency, ironically it was not his money that gave him the edge. In fact, his campaign is reckoned to have cost half that of Hillary Clinton’s! It was not the money that worked for Trump but the strategic positioning of himself at the crest of a wave of resentment and anger. Think what you will of that strategy, but don’t blame money for the outcome.

There have been efforts earlier to bring about campaign finance reform in India, but none has come close to getting widespread support. Moreover, most of them suffered from the same bias -- of contempt for the use of money in politics, rather than accepting it as a necessity and regulating its legitimacy and levelling the playing field -- that have led to this crisis in the first place.

A classic example was the Indrajit Gupta committee of 1998. It had made some pragmatic recommendations, such as the gradual introduction of state funding of campaigns, limited to parties recognised by the Election Commission as national or state parties. But it had a bizarre aversion to money, insisting that state funding should be in kind, such as rent-free accommodation, fuel for candidates, loudspeakers and so on, in impractical, excruciating detail.

Though the idea of state funding has occasionally been bandied about in India, it has usually lacked conceptual clarity and, even more importantly, a lack of consensus on the idea itself. Take, for instance, the Law Commission of India’s 2015 recommendations, which came about after lengthy deliberations. Though it contains many useful ideas, they are mostly about incremental improvements in expenditure control during elections. Neither does it recommend state funding, nor does it deal with the roots of black money in campaigns.

The Election Commission has recently taken a stab at the latter, by floating the idea that the ceiling for anonymous political donations be lowered from the present Rs 20,000 per donation to Rs 2,000. This is one of the most critically-needed reforms, since vast sums of black money are funnelled into politics by claiming alleged -- and anonymous -- donations of Rs 19,999 each.

It is legitimate for political parties to want some funds to be collected in cash, even anonymously, for instance, at large rallies where the hustle and bustle make it impractical to do paperwork or collect details.

However, that must not be an excuse to claim unrealistic sums.Reducing the ceiling drastically -- I would go even further and lower it to Rs 500 -- and limiting this option for only donations received at public rallies, would sharply limit what could be thus collected.

Some sceptics have doubted that this would have much effect. But it will, since parties would have to demonstrate humongously bigger rallies than at present, of millions of attendees instead of lakhs, to justify the funds being collected. That simply won’t happen. Moreover, even if any party were to attempt it, at Rs 500 limit per anonymous donation, the cost of organising such rallies would exceed the anonymous donations that could be claimed!

More would need to be done to enforce the legitimacy and traceability of funds that find their way into politics. For instance, political parties enjoy tax exemption on the funds they raise. That ought to be limited to only the funds raised from sources that are traceable, legitimately-earned and tax-compliant. The enormity of the impact that these would have on cleaning up our politics simply cannot be overstated.

But implementation and enforcement of such a fundamental change will need the powers of the Election Commission (EC) to be enhanced. Ironically, though political parties are required to have their accounts audited, many simply don’t bother with auditing. And those that do can get away with brazenly fictitious book-keeping, audited by friendly accountants, secure in the knowledge that the EC does not actually have the powers to either enforce proper audits or penalise violations. It is shocking that the EC, arguably our most credible constitutional authority, does not have these powers.

There have been proposals to include political parties’ accounts under the Right to Information (RTI) Act, in the hope that public shaming and pressure could get them to reform. But a far more effective way would be to empower the EC instead. It would avoid overlapping powers between authorities, and provide for enforcement and remedial measures, rather than mudslinging or prolonged litigation. The EC must be empowered to both enforce audits of political party funds, and to impose penalties. The latter could range from minor fines, to freezing funds, all the way up to suspending or derecognising parties and disqualifying candidates for gross and willful violations.

These proposed measures all reinforce the intrinsic acceptance that the use of money in election campaigns is natural, but at the same time also rigidly ensure the legitimacy, traceability and tax-compliant nature of such funds. They would go a long way towards checking black money in politics, not to mention the cascading effects it has in many other sectors.

Nevertheless, further reforms would be needed to ensure a level playing field between richer and poorer parties and candidates. This is where state funding comes in, an idea which has been deployed in other democracies. In India, it has its share of proponents, but has usually been floated without details of how it would function. The principle of state funding itself needs justification, because some sceptics have questioned why taxpayer funds should be “wasted” on politics. The answer must lie in a core belief that democracy is a good thing, and that for it to function effectively, the funds used in politics must both be legitimate as well as regulated in a manner that is equitable to rich and poor candidates alike.

Thus far, the regulations to make electoral contests equitable with regard to funding have relied on campaign expenditure caps, which have failed miserably. State funding is the answer to ensuring that equity. And the essential element of this equity must focus on levelling the playing field between wealth and popularity.

In other words, state funding must provide a financial boost to parties and candidates that may be popular but are disadvantaged by having opponents who are wealthy. The way to do this is to provide state funding as matching grants to the legitimate, traceable and tax-compliant funds raised by parties and candidates. Furthermore, the matching grants must disproportionately reward small donors over big ones. Thus, for instance, for every Aadhaar-corroborated individual donation received between Rs 500 and Rs 10,000, the state funding could be a matching grant of, say, five times that amount.

This would vastly boost the prospects of parties and candidates that are able to mobilise legitimate, tax-compliant donations from a large number of small donors -- which demonstrates their popularity -- against opponents that are wealthier or can mobilise large donations from, say, corporates.

Taken together, these measures would radically restructure the nature of political funding in India, change the underlying systemic incentives and put in place effective control systems.

But can all this actually happen?

The rot has gone so deep that thinking Indians find it hard to conceive how politics can function without black money. Thus, even the most well-intentioned of opinion-makers say something along the lines of “well, of course it would be a good thing to cleanse politics of black money, but it is impossible to achieve in practice, it will never happen.”

It is a good thing, then, that the vast majority of Indians who support remonetisation have rather more cut and dried views on black money. In other words, there are huge, hidden reserves of unambiguous support among the public for radical restructuring of political funding. It is just waiting for a brazen enough leader to pick up the gauntlet.

The Prime Minister has not only come out in support of the Election Commission idea to lower the cap for anonymous donations, but reportedly also exhorted his colleagues to support greater transparency in party funding. If his stunning gambit on remonetisation is to lead to a lasting legacy of transforming India, he must go boldly where no Indian politician has gone before, and reform political funding.