Budget 2017: Crafty politicians can bend the new rules on political funding even in their sleep

At long last, the much-anticipated 2017 budget presentation is in.

While neither a universal basic income nor a banking transaction tax was included, measures aimed at cleaning India’s opaque system of financing elections earned a surprisingly prominent position.

In the wake of demonetisation, the government has been keen to show that it is taking serious steps to ensure that no one is free of the cleansing – not least the political class. Indeed, one of finance minister Arun Jaitley’s core objectives on February 1 – described at the outset of his speech – was to offer proposals that would “clean the country from the evils of corruption, black money and non-transparent political funding.”

Within minutes of the speech, government backers and many independent analysts hailed the new measures on political finance as bold, innovative, and game-changing. But are they really?

Let’s consider each proposal in turn.

Donation limit

The first change Jaitley announced was to limit the amount of cash donation any individual can make to a political party to a maximum of Rs 2,000. Under existing law, no single contribution made in cash can exceed Rs 20,000. Any amount over this threshold must be transmitted by cheque and, crucially, the identity of the donor must be publicly disclosed. This basic premise remains largely intact under the new rules, but the government is instituting two modifications.

First, the threshold for disclosure will be reduced significantly (from Rs 20,000 to Rs 2,000); and second, this threshold will be tied to the individual rather to any single contribution. According to prevailing laws, donors can make an infinite number of payments without disclosing their identity by segmenting their donation up into multiple, smaller contributions. Since no single payment exceeds the Rs 20,000 threshold, parties are able to keep the vast majority of their funding hidden.

Unfortunately, the proposed change will have limited impact when it comes to correcting this infirmity. As long as there is the possibility of making anonymous contributions of any kind, you can trust that parties and donors will exploit that opportunity – although slightly greater ingenuity might be required.

Imagine an individual expresses a willingness to donate Rs 50,000 to his preferred party. There is absolutely nothing stopping the party from recording that transaction as 25 separate contributions of Rs 2,000 from 25 “unknown” donors. The only solution to this is, as one of us has written previously, is to insist on total transparency for every paisa of political giving. This way, every donation can be linked to a clear paper trail with a name, address, and even a PAN card or Aadhaar number.

Cashless craft

The second change Jaitley announced was that political parties “will be entitled to receive donations by cheque or digital mode from their donors.” The use of the word “entitled” is crafty; as far as we know, there is currently no obstacle to a party that wants to accept contributions by cheque or digital payment.

What the government could have announced instead, if it was intent on pushing the envelope, is that parties will be “required” to receive any and all donations through non-cash means. After all, the government has defended demonetisation as a necessary – if painful – step on the path to a 21st century cashless economy. If kirana shop owners, street vendors, and myriad others are being compelled to accept digital payments, surely political parties should lead by example?

Timely returns

Jaitley’s third initiative has to do with the tightening up of provisions under the Income Tax Act. Under current law, political parties are already required to keep up-to-date books, maintain records of the names and addresses attached to large contributions, and have their accounts audited. In order to enjoy tax exempt status, they must also file their IT returns on an annual basis.

What is new in the government’s proposal is the requirement that these returns should be submitted “within the time prescribed.” This is a welcome move, especially if this requirement is backed up by enhanced enforcement. Right now, many parties – especially smaller regional parties – do not even bother to submit their IT returns on time, if at all.

However, even if the government succeeds in compelling parties to improve the timeliness of their disclosures, it must not turn a blind eye to other festering problems on the tax side.

Arguably the most important task is to ensure that tax authorities carefully scrutinise the declarations parties actually submit. The Association of Democratic Reforms, the leading watchdog working in this area, has reported that “there is a lack of frequent and complete scrutiny of financial disclosures of political parties” by the IT department.

And, worryingly, the authenticity of the information it does receive is dubious at best. With no requirement of a third-party audit, most parties simply find a hand-selected accountant to sign on to whatever they provide. This lack of scrutiny and accuracy naturally makes enforcement all but impossible.

The ‘big idea’

Finally, and most significantly, there is the novel introduction of electoral bonds, a move the government has hailed as one of the budget’s “big ideas.” While the proposal has piqued the interest of many analysts, it is frankly difficult to fully assess it without seeing the details, which are few and far between as of now. But, to the best of our knowledge, the scheme would likely operate as follows:

A corporation that wishes to make a Rs 25,000 contribution to a political party could purchase bonds in that amount from a notified bank. The funds would now become part of the banking system – but the identity of the purchaser would not be revealed (although the RBI would keep this information on file). The corporation could then deposit these bonds into a specially designated bank account of a registered party. Here, the party would know who the donor is, but the public would not. This, in essence, legitimates what is already rampant: anonymous corporate giving.

Insofar as this money resides “above board,” rather than under-the-table, this new scheme is an improvement over the status quo. However, this benefit comes at the cost of transparency vis-à-vis the public. Citizens, civil society, and the media would be no closer to knowing the true sources of party funds than before.

If a mining conglomerate, for instance, decided to bankroll a party in Goa (with the intention of buying goodwill in exchange for regulatory benefits down the road) through bonds, the voters of Goa would be none the wiser. Furthermore, will donors truly believe their identity will remain anonymous? Will banks be honest stewards of this information? Only when we have data on take-up of these bonds will we be able to assess the effectiveness of this measure.

All told, the Narendra Modi government’s proposals are a positive step in the right direction. To give credit where credit is due, the government deserves plaudits for raising the issue of political finance reform and tabling its proposals for open debate. From his comments on the campaign trail in 2013 to his televised New Year’s Eve address one month ago, the prime minister has regularly maintained that upending India’s murky system of political finance is one of his top priorities. Now, he has finally acted on this pledge. But this budget’s pronouncements only represent the first hint of spring cleaning.

Milan Vaishnav is a senior fellow at the Carnegie Endowment for International Peace and the author of the new book, When Crime Pays: Money and Muscle in Indian Politics (HarperCollins India, 2017).
Rebecca Brown is a Junior Fellow at the Carnegie Endowment.

This article first appeared on Quartz.