India’s Political Party Finance Reform Falls Short of Ensuring Complete Transparency—But Is Still a Step in the Right Direction

On March 1, 2018, India began its latest effort to clean up the financing of political parties and elections. This efforts involves the sale of so-called “electoral bonds” at select state banks across the country. The term “electoral bonds” is a misnomer, for these “bonds” are not linked to elections, nor do they involve paying back a loan or yielding interest. Rather, these instruments are simply a new means to facilitate financial donations to political parties, and are intended to displace the undocumented cash transfers that form the lifeblood of Indian politics. As India’s Finance Minister argued, this cash-based system causes two problems: First, “unclean money from unidentifiable sources” facilitates corruption and money laundering. Second, the reliance on cash allows parties to underreport both their budgets and spending. These concerns led the government last year to reduce the limit on anonymous cash donations from $300 to $30. Electoral bonds intend to further disrupt the system and achieve at least some increases in transparency of political spending.

Announcement of the new system has generated significant commentary, with the few admirers crowded out by the numerous detractors (see, for example, here, here, and here). The main focus of criticism is the new scheme’s guarantee of donor anonymity: Electoral bonds will carry no name and nobody, other than the bank and donor, can know who made the donation unless the donor willingly discloses her identity. The government has defended the anonymity guarantee as a way to prevent reprisals against donors, but critics understandably argue that the lack of transparency means that much political financing will continue to come from “unidentifiable sources,” allowing big business to keep lobbing money in exchange for policy favors while the public remains in the dark. (Moreover, the government’s emphasis on fear of reprisals as the rationale for anonymity suggests the government is unduly concerned with protecting the only class of donors for whom this would be a significant concern, namely large capitalists.) The electoral bond scheme has thus been painted as a move that potentially strengthens the crony capitalism responsible for India’s dire economic situation.

This strong negative reaction to the electoral bond scheme is, in my view, overwrought. True, the new policy does not solve the deep and serious problems with political finance in India. But it does have some notable advantages over status quo. Additionally, critics of the electoral bond system sometimes seem to treat donor transparency as an unalloyed good, when in fact donor transparency may have some drawbacks as well (even if one doesn’t take too seriously the government’s official line on political reprisals). Let me elaborate on each of these points:

  • First, most critics of the electoral bond reform emphasize that the new funding mechanism won’t eliminate corruption, cronyism, and other problems from Indian politics. In this they are correct, but nobody, including the government and the plan’s other proponents, would disagree. Indeed, the government’s own statements about the benefits of the new system would best be described as “cautious optimism” and not more; the government said only that electoral bonds would help get “some” additional transparency in the system. The anonymous electoral bonds do not replace checks and demand drafts, which will continue to exist as more transparent vehicles for political donations. What the new bonds do seek to replace are cash-based payments that have remained the primary source of funds, and are entirely non-transparent. Of course, instead of bonds, the government could have simply chosen to ban cash payments, only allowing political donations through fully transparent means. This may well have been a better policy in an ideal world. But it would have been hugely disruptive, and one suspects the experience of demonetization (a well-intentioned reform that caused considerable chaos) has made the government wary of introducing extreme measures given how cash-centric India continues to be. All that said, the beneficial effects of the new electoral bond scheme will only be realized if there is a concerted effort to improve enforcement of disclosure laws operating upon political parties. Currently, Indian law does too little on this front. Political parties are beyond the scope of the Indian freedom of information law; details of regular donations are not open to the public, political parties regularly miss deadlines for audit filings without facing consequences, and when reports are eventually filed they contain numerous errors and inaccuracies (see here and here). So, while the new electoral bond scheme is certainly a step in the right direction, a lot more needs to be done to ensure accurate reporting of political parties’ finances and thereby helping to cleaning Indian politics of corrupt influences. But this important point should not obscure the fact that the electoral bond scheme, while not by itself sufficient, is a step in the right direction.
  • Second, and speaking more generally to the electoral bond scheme critics’ enthusiasm for full donor transparency, it’s not entirely clear that transparency of political donations is always desirable. In their work at the turn of the millennium, Professors Bruce Ackerman and Ian Ayres explored whether making all campaign donations anonymous might reduce the corrupt influence of big money on politics. The logic is that if politicians can’t know where their donations came from, it defuses the possibility of perverse policy decisions being made as favors to large donors; a 2014 study suggests some empirical support for this claim. I am not suggesting that the electoral bond scheme will have this effect, not least because it’s still possible for individuals or firms to make donations that are traceable to them. They can write a check, for example. Even if they use an electoral bond, the donor can still make a call and confirm her identity covertly to the recipient (though of course the donor could be lying). More worryingly, the party in power might be able to unearth donor identities because of its control over state banks. So again, the argument here is not that the electoral bond scheme approximates the sort of anonymous donation system advocated by Professors Ackerman and Ayers, and others. The point is that we need to be careful not to assume that more donor transparency is always good. Indeed, one might even argue that the electoral bond scheme might be a useful first step, not toward greater donor transparency, but to a beneficial form of donor opacity.

The first sale of bonds having concluded, India’s Election Commission stated it will soon make its recommendations regarding the operation of the system. With India going to polls in several states during 2018, and nationally in 2019, expect the issue to attract some attention in the coming months ahead.

4 thoughts on “India’s Political Party Finance Reform Falls Short of Ensuring Complete Transparency—But Is Still a Step in the Right Direction

  1. Fascinating — especially your point about questioning the assumption that more donor transparency is always beneficial. That reminds me of voting itself: a citizen can always say they will vote for a candidate if he or she pursues certain policies, but that can never be verified. Of course, each citizen has only one vote. But if donations were fully opaque, it does make sense that leaders would not necessarily know whom they needed to “pay back.” Intuitively, it does seem like the “partial anonymity” systems that most jurisdictions have is the worst of both worlds: only candidates know whom they have to pay back, without the public also knowing and able to add scrutiny.

    • I also support your arguement. Hiding the donors will make the system more perverted. This is an experiment, let us wait and see the results.

  2. Very interesting post, thanks Abhinav. You mention in your first bullet point that the beneficial effects of the new electoral bond scheme will only be realized if there is a concerted effort to improve enforcement of disclosure laws. Do you expect an improvement in enforcement? Curious to hear your thoughts here.

    • Hi Jimmy. Well, I don’t see any such improvement happening from regular democratic processes. Like many other areas, it might just be that the Indian Supreme Court intervenes to make something happen. But, there again, I suspect the Court will hesitate fearing the strength of the bi-partisan backlash that it might face.

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