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Context: Regulating political funding in India faces challenges due to the absence of donation limits on individuals, the removal of official contribution limits on companies, and the introduction of electoral bonds, raising concerns about transparency.

Key Highlights

Donations

• Certain jurisdictions prohibit specific entities like foreign citizens or companies from making political donations.
• Donation limits are implemented to prevent the undue influence of a few large donors, ensuring a more democratic political process.
• The US, for instance, employs different contribution limits for various donor types, while the UK relies on expenditure limits.

Expenditure Limits

• Expenditure limits aim to prevent a financial arms race among political parties, alleviating the pressure to compete for funds.
• In the UK, political parties are restricted from spending beyond a specified amount per contested seat.
• Constitutional interpretations, particularly the US Supreme Court's expansive view of the First Amendment, pose challenges to imposing expenditure limits.

Public Financing

• Public funding can be based on predetermined criteria, such as a party's significance within the political system.
• Germany, for example, allocates public funds based on factors like past election results, membership fees, and private donations.
• The US has experimented with "democracy vouchers," where eligible voters receive vouchers to donate to their preferred candidate.

Disclosure Requirements

• Disclosure serves as a less intrusive regulatory approach, promoting transparency without outrightly restricting donations.
• The challenge lies in striking a balance between transparency and donor anonymity.

India's Challenges

• India lacks donation limits on individuals, and the Finance Act of 2017 removed official contribution limits for companies.
• No legal expenditure limits on political parties allow unrestricted spending on campaigns.
• Disclosure requirements mandate reporting donations above Rs 20,000, but a loophole enables parties to split large donations to evade disclosure.
• The introduction of electoral bonds raises concerns as it allows large donors to conceal contributions, compromising transparency and enabling quid pro quo arrangements.

Changing Dynamics in Electioneering

• The evolving landscape of electioneering with increased involvement from political consultancies, campaign groups, and civil society organizations.
• The relatively lenient regulation of third-party expenditure in the US has led to the rise of shadow campaigns that impact political outcomes but fall outside traditional campaign finance regulations.

Regulating Political Funding

• Political funding is a crucial aspect of any democracy, as it affects the quality and fairness of elections, the accountability and transparency of political parties, and the influence of money in politics.
• Different countries have different approaches to regulating political funding, depending on their political systems, cultures, and challenges.

Reasons for Regulating Political Funding

Preventing Corruption

• Unregulated political funding can create an environment where donors, whether individuals or corporations expect favourable treatment or policy decisions in return for their financial contributions.
• Regulation helps establish clear rules about the permissible interactions between politicians and donors, preventing clandestine agreements that could compromise the integrity of the political system.

Ensuring Fair and Equal Representation

• Without regulations, wealthier individuals or interest groups could disproportionately influence political outcomes, potentially marginalizing the concerns and priorities of the broader population.
• Regulations may include caps on campaign contributions and spending, levelling the playing field and ensuring that candidates with diverse financial resources can compete effectively.

Enhancing Accountability

• Regulations typically mandate the disclosure of political contributions and expenditures. This transparency enables voters to hold politicians accountable for their financial backers and helps prevent undisclosed conflicts of interest.
• Regulatory frameworks often include mechanisms for oversight and investigation into potential breaches of ethical standards, providing a means to hold politicians accountable for any improper conduct related to political funding.

Safeguarding National Security

• Political funding regulations may include measures to restrict or monitor foreign contributions, preventing external entities from manipulating domestic politics to serve their interests.
• Unregulated foreign funding could compromise national security by allowing undue influence over policies or political decisions that may not align with the country's best interests.

Promoting Public Trust

• Clear and enforced regulations contribute to a transparent political process. When the public understands how campaigns are financed, it fosters trust in the democratic system, ensuring citizens that their representatives are not unduly influenced by hidden agendas.
• Knowing that there are consequences for violating funding regulations enhances public trust by demonstrating that politicians are answerable for any misconduct related to campaign financing.

Preventing Oligarchic Influence

• Regulations often include limits on the amount an individual or entity can contribute to a political campaign. This prevents a concentration of political power in the hands of a small group, promoting a more equitable distribution of influence.
• By preventing the dominance of a few wealthy contributors, regulations encourage a diverse set of individuals to participate in politics, contributing to a more representative and inclusive democracy.

Encouraging Political Participation

• High campaign costs can discourage individuals with limited financial resources from entering politics. Regulations that control spending can reduce these barriers, encouraging a wider range of candidates to participate and fostering a more dynamic political landscape.
• Some regulatory frameworks include provisions for public funding of political campaigns, further democratizing the electoral process and reducing dependence on private donors.

Maintaining the Integrity of Elections

• Regulations aim to create an environment where political outcomes are determined by the merit of ideas and policies rather than the financial strength of candidates.
• By setting limits on individual and corporate contributions, regulations prevent any single entity from exerting undue influence over the electoral process.

Addressing the Influence of Special Interest Groups

• Regulations require the disclosure of political contributions, helping to expose any attempts by special interest groups to sway policies in their favour.
• Regulatory bodies often investigate potential conflicts of interest to ensure that policies are crafted in the broader public interest rather than catering to specific groups.

Preserving Democratic Values

• Political funding regulations align with the democratic principle that political power should be derived from the collective will of the people. By mitigating the impact of financial advantages, regulations contribute to a more equitable and representative democracy.

Significance of regulating political funding

Enhancing the quality and integrity of elections

• Regulating political funding can improve the quality and integrity of elections, by reducing the scope for vote-buying, coercion, or manipulation by moneyed interests. This can increase voter turnout and participation, as well as the legitimacy and credibility of election outcomes.

Strengthening the accountability and transparency of political parties

• Regulating political funding can also strengthen the accountability and transparency of political parties, by making them more responsive to their members and supporters, rather than their donors. This can improve their internal democracy and governance, as well as their policy platforms and performance.

Reducing the influence of money in politics

• Regulating political funding can also reduce the influence of money in politics, by limiting the power of wealthy individuals or groups to sway public opinion or policy decisions. This can foster greater pluralism and diversity in the political arena, as well as more public interest-oriented policies.

Steps taken to regulate political funding

Imposing limits on donations and expenditures

• India has imposed limits on the amount of donations that individuals or companies can make to parties or candidates, as well as the amount of expenditures that parties or candidates can incur during elections.
• These limits are revised periodically to account for inflation or changing circumstances. 

Providing public financing to parties or candidates

• India has provided some form of public financing to parties or candidates, such as free or subsidized access to media, transportation, security, or electoral rolls.
• Some states have experimented with direct cash transfers to candidates based on certain criteria.

Introducing disclosure and reporting requirements

• India has introduced disclosure and reporting requirements for parties or candidates, such as filing income tax returns, audited accounts, contribution reports, expenditure statements, etc.
• These reports are submitted to various authorities, such as the Election Commission of India (ECI), the Income Tax Department, etc., and are made available to the public through online portals or publications.

Creating new instruments for political funding

• India has created new instruments for political funding, such as electoral trusts and electoral bonds.
• Electoral trusts are registered entities that collect donations from various sources and distribute them to eligible parties or candidates.
• Electoral bonds are bearer instruments that allow anonymous donations to parties through designated banks.

Challenges in Regulating Political Funding

Lack of compliance and enforcement

• Many parties or candidates do not comply with the existing rules and regulations on political funding, either by under-reporting or not reporting their donations or expenditures at all.
• There is a lack of effective enforcement mechanisms to monitor, verify, penalize, or prosecute violations of these rules and regulations.

Loopholes and circumventions

• Many parties or candidates also exploit loopholes or circumvent the existing rules and regulations on political funding, either by using cash transactions, shell companies, dummy candidates, proxy donors, etc.
• These practices make it difficult to trace the origin or destination of political funds, as well as to assess their impact on elections or policies.

Inadequate public financing and expenditure limits

• Many parties or candidates also face difficulties in accessing adequate public financing or complying with the expenditure limits, either due to insufficient allocation, delayed disbursal, unrealistic estimation, or inflationary pressures.
• These factors create a demand for private or illicit funding, as well as an incentive for overspending or wastage.

Controversy and litigation over new instruments

• Many parties or candidates also face controversy and litigation over the new instruments of political funding, such as electoral trusts and electoral bonds.
• These instruments have been criticized for being opaque, unaccountable, discriminatory, or unconstitutional, by various stakeholders, such as civil society groups, opposition parties, or the judiciary.

Way forward for regulating political funding in India

Strengthening compliance and enforcement

• There is a need to strengthen the compliance and enforcement of the existing rules and regulations on political funding, by enhancing the capacity, autonomy, and coordination of the relevant authorities, such as the ECI, the Income Tax Department, etc.
• There is a need to increase the awareness and participation of the public and the media in scrutinizing and exposing violations of these rules and regulations.

Closing loopholes and preventing circumventions

• There is a need to close the loopholes and prevent the circumventions of the existing rules and regulations on political funding, by introducing stricter norms, such as banning cash transactions, anonymous donations, corporate donations, etc.
• There is a need to adopt more innovative methods, such as digital payments, blockchain technology, etc., to track and verify the flow of political funds.

Enhancing public financing and rationalizing expenditure limits

• There is a need to enhance the public financing and rationalize the expenditure limits for parties or candidates, by increasing the allocation, ensuring timely disbursal, revising periodically, or linking with performance indicators.
• There is a need to encourage more voluntary contributions from citizens, such as crowdfunding, membership fees, etc., to reduce the dependence on private or illicit funding.

Reviewing and reforming new instruments

• There is a need to review and reform the new instruments of political funding, such as electoral trusts and electoral bonds, by making them more transparent, accountable, equitable, and constitutional.
• There is a need to consult and involve various stakeholders, such as civil society groups, opposition parties, or the judiciary, in designing and implementing these instruments.

Conclusion

• Regulating political funding is a complex and dynamic issue that requires constant attention and adaptation. India has made some progress in this regard but still has a long way to go. By adopting a holistic and balanced approach that addresses the various aspects and challenges of political funding in India, we can ensure that our democracy remains vibrant and healthy.

Must Read Articles:

Relationship between Political Funding And Electoral Outcomes: https://www.iasgyan.in/daily-current-affairs/relationship-between-political-funding-and-electoral-outcomes

Electoral Bonds and Electoral Trusts: https://www.iasgyan.in/daily-current-affairs/electoral-bonds-and-electoral-trusts

PRACTICE QUESTION Q. How have recent regulatory measures, such as the introduction of electoral bonds and limits on cash donations, contributed to enhancing transparency and accountability in political funding in India, and what challenges persist in ensuring a fair and corruption-free electoral financing system?