Political finance has long served as the wellspring of corruption in India. For the average Indian, it is hardly breaking news to learn that the murky flow of funds that fuels politicians and political parties largely explains why corruption remains endemic in India. As the costs of elections have soared, politicians—and the bureaucrats under their sway—have mastered the art of skillfully manipulating the regulatory and policy levers at their disposal in exchange for easy campaign cash. And if an aspiring candidate is so lucky as to win higher office, the quest to rebuild one’s coffers for reelection start afresh. Campaign spending is an investment—one that pays back with interest once you are in office. While these realities are well known, the dark currents of political funding largely flow out of public view.

Milan Vaishnav
Vaishnav’s primary research focus is the political economy of India, and he examines issues such as corruption and governance, state capacity, distributive politics, and electoral behavior.
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Amidst this depressing backdrop, in 2017 the Modi government touted the creation of a new political funding mechanism, known as electoral bonds, as a harbinger of a new era of transparency and accountability. In truth, electoral bonds have only legitimized opacity. The government has promised reform, while doubling down on nefarious old habits. But as a recent five–part investigative series in HuffPost India#PaisaPolitics—authored by the journalist Nitin Sethi reveals, this new instrument has done something more: it has intensified the crisis confronting India’s much-vaunted apex institutions.

Political interference, executive overreach, the failure to propagate standards of accountability—both within institutions and outside them—have long plagued India’s institutional edifice. But, for decades, we have consoled ourselves by highlighting the fact that a great many institutional maladies afflicting Indian governance have largely been relegated to lower–level agencies and bodies. In the memorable words of economist Lant Pritchett, “the head, that is the elite institutions at the national (and in some states) level remain sound and functional but this head is no longer reliably connected via nerves and sinews to its own limbs.”

The most striking aspect of Nitin Sethi’s remarkable investigation into electoral bonds—their origins, design, and operations—is the pall it casts on venerable institutions, from the Reserve Bank of India (RBI), the Election Commission of India (ECI), and even Parliament. All expressed serious reservations about the electoral bonds scheme and an extremely powerful executive, backed by the first single party Lok Sabha majority in three decades, methodically steamrolled them all. All told, the series reveals deeply disturbing trends about India’s apex institutions.

In his 2017 Budget speech, then-Finance Minister Arun Jaitley announced the government’s intention to introduce a new modality of electoral funding that would distinguish itself from the shadowy status quo by embracing the celebrated—but often absent—principle of transparency in election finance. It took nearly a year to notify the scheme, but the basic operating framework was simple. Individuals, associations, and corporations wishing to make donations to political parties could approach the State Bank of India (SBI) and purchase (tax free) time–limited bearer bonds in specified denominations during certain windows of time throughout the year that they could subsequently deposit into the registered bank accounts of political parties.

The kernel of transparency the government loudly touted sprung from the fact that electoral bond transactions occurred through the formal banking system, thereby ensuring—in the government’s view—that only legitimate entities using white money could avail of the scheme. As a result, the SBI—and presumably the banking regulator—would know which entities had made donations to which political parties thanks to a digital paper trail. Unfortunately, this is where the transparency begins and ends. The donor faces no obligation of reporting the donation and the recipient—the political party—need not disclose the donor’s identity. So, for all intents and purposes, each and every bond transaction is, well, highly non-transparent. To put a finer point on it, opacity is not simply incidental—it is intrinsic to the design of the scheme.

At the time electoral bonds were introduced, the government also enacted a number of additional changes to campaign finance law through provisions in the Finance Act that have further muddied the waters.

First, it eliminated the cap on corporate donations, previously restricted to 7.5 percent of a firm’s average net profits in the past three years. Second, it dropped the requirement that companies disclose details of their political giving. Instead of issuing a thorough inventory of political donations in their annual statement of accounts, firms would only have to divulge an aggregate figure. Third, the government—with support from the opposition—amended the Foreign Contribution Regulation Act (FCRA) to expand the definition of a “foreign” firm, with the express intent of widening the ambit of firms that could legally make political donations. The upshot of these changes was as obvious as it was unfortunate. Any individual, firm or special interest group could now give an unlimited sum of money to any political party without disclosing a single rupee and nobody—no voter, no citizen, no journalist, and no civil society representative—would be able to connect the dots.

To be fair, all of this was known when the electoral bond scheme came into force in early 2018. But what the HuffPost India investigation tells us is a much broader story of institutional weakness.

As the Finance Ministry was preparing its 2017 Budget and crafting the precise language around electoral bonds, it belatedly sought guidance from the RBI when it realized—at the eleventh hour—that the scheme would require amendments to the RBI Act. On January 28, 2017, the ministry urgently wrote the RBI for comments on the proposed amendments. On January 30, the RBI responded by conveying its deep misgivings, arguing that the electoral bond scheme was vulnerable to money laundering, opacity, and potential abuse. The Finance Ministry’s internal rejoinder suggested that the RBI’s reservations were misguided and, in any case, too late: the Finance Minister was to present the annual budget on February 1. The episode was reminiscent of another ill-fated policy innovation—demonetization—when the Finance Ministry essentially presented the currency move to the apex bank as a fait accompli. In the latter case, consultations with the RBI were largely pro forma; in the case of electoral bonds, the RBI was deemed to be too insignificant to matter.

Another apex institution, the Election Commission of India (ECI), fared little better. For decades, the ECI has been at the forefront of the battle to combat black money and opacity in Indian elections. Warehouses could be filled with public statements, white papers, and recommendations the ECI has offered up on campaign finance reform in recent years. So it is hardly shocking that the ECI vociferously objected to the proposed system of electoral bonds, which accept opacity as an essential feature. The ECI argued its objections to the Government on multiple grounds: concerns about foreign influence, the further consolidation of a corrupt business–politics nexus, and legal loopholes that could allow for dodgy money to be routed through shell companies. These concerns fell on deaf ears.

In fact, the back–and–forth between the ECI and the Government implicates yet another crucial federal institution—the Parliament. When asked by a Member of Parliament (MP) whether the ECI had expressed any concerns over electoral bonds, the then–minister of state for finance answered in the negative. What followed was an intense cover-up on the part of Finance Ministry officials who realized that the minister had erred in issuing such an unequivocal denial. Exploiting the fact that the ECI’s written objections to the scheme were directed to the Law Ministry (rather than the Finance Ministry) and the fact that the ECI’s subsequent entreaties to the Finance Ministry occurred in face–to–face meetings, ministry mandarins claimed that the Finance Ministry had not received any formal (read: written) complaints (The HuffPost India investigation actually shows that both of these excuses were later proven false).

The Prime Minister’s Office (PMO) too has a role to play in this sordid story. Under the rules governing the operation of electoral bonds—published in January 2018—the SBI is authorized to issue electoral bonds during a 10-day period at the start of each quarter (January, April, July, and October) and an additional 30–day period in the year of Lok Sabha elections. The ink had hardly dried on these regulations when the PMO allegedly intervened to compel the SBI to open three special windows in March, April and May 2018. This was a critical time as the Karnataka assembly elections were held on May 12 (it is worth nothing that a similar exception was made in November 2018 in advance of the December assembly elections held in six crucial states). To add insult to injury, the Finance Ministry instructed SBI to encash bonds totaling Rs. 10 crore even though the time-limited bonds had expired and the Karnataka elections were completed (the election resulted in a hung assembly). It is unclear which party benefited from this exception and whether it directly impacted post-election horse-trading.

But the enthusiasm expressed by the government is easy to understand in light of what we know about who has benefited from electoral bonds. A Right to Information (RTI) request analyzed by the Association for Democratic Reforms (ADR) revealed that 95 percent of electoral bond purchases made in 2017–18 went to the ruling Bharatiya Janata Party (BJP).

In the end, the lessons of #PaisaPolitics are straightforward. First, transparency of any meaningful sort continues to elude political funding in India. In fact, the only entity that has a clearer picture of the political finance realities in India today is the government itself. Electoral bonds on their own have not constructed this opaque reality; they have only served to ossify it. Second, nearly every independent institution of the state that has come into contact with the electoral bonds scheme—the RBI, the ECI, Parliament—has expressed reservations but proved unable or unwilling to affect change. In turn, the executive has further expanded its reach, and the credibility crisis afflicting India’s core institutions continues apace. Finally, the BJP was propelled to power in 2014 after delivering a devastating critique of the Congress-led United Progressive Alliance’s tenure, which was marked by excesses of cronyism and graft. Modi pledged his government would reverse the country’s institutional decline and root out political corruption. Alas, electoral bonds have only hastened the former and institutionalized the latter.

This article was originally published in HuffPost India.