Financial Asymmetry in Political Funding in India

Syllabus: GS2/ Polity and Governance

Context

• Ahead of successive electoral cycles, concerns have intensified regarding transparency in India’s political funding framework, with unequal access to private donations distorting electoral competition.

Political Funding in India

• Individual Donations: Section 29B of the Representation of the People Act (RPA) 1951, permits political parties to accept donations from individual persons.
  • The Election Commission of India’s Transparency Guidelines require the disclosure of donations over ₹20,000 under the Act.
• State/Public Funding: State funding of elections in India involves the government providing financial support to political parties and candidates.
  • Direct Funding: Monetary assistance directly to parties/candidates for campaign expenses.
  • Indirect Funding: Includes subsidized media access, tax benefits, free public spaces for campaigns, and support for utilities, transport, and security.
• Corporate Funding: Governed under Section 182 of the Companies Act, 2013. Corporate donations were banned in India from 1969 until 1985. Key conditions for Donation are as;
  • Companies must be at least three years old.  
  • Donations are capped at 7.5% of the average net profits made during the three immediately preceding financial years.  
  • Contributions must be disclosed in the company’s profit and loss account. 

Challenges in the Existing Funding Framework

• Concentration of political finance: Political funding is heavily skewed in favour of a few dominant parties, leading to an uneven distribution of financial resources and weakening electoral competition.
• Weak transparency: Disclosure requirements are inadequately enforced, and key information on donor–party linkages remains outside the public domain, limiting meaningful citizen scrutiny.
• Lack of internal party accountability: Most political parties function without enforceable norms of internal democracy, transparent decision-making, or rigorous financial auditing.
• Unlimited party spending on more ambitious, sophisticated and professional campaigns has resulted in increasing costs of elections.

Electoral Trust Scheme

• Electoral Trust Scheme: The electoral trust scheme was introduced by the government in 2013.
• Electoral trusts are one of the funding channels for political parties.
  • They became a preferred source of political donation for companies in 2024-25 after the SC scrapped the electoral bonds scheme in 2024.
  • Both schemes are meant to facilitate donations to political parties by corporations and individuals.
• Eligibility: Any company registered under the Companies Act can form an electoral trust.
  • Any citizen of India, a company registered in India, or a firm or Hindu Undivided Family or association of persons living in India, can donate to an electoral trust.
• Three trusts, Prudent Electoral Trust, Progressive Electoral Trust and New Democratic Electoral Trust, accounted for 98 percent of all contributions in 2024-25.

How do These Trusts Function?

• Renewal Requirement: Electoral trusts must apply for renewal every three financial years to continue operating.
• Eligible Beneficiaries: Donations can be made only to political parties registered under Section 29A of the Representation of the People Act, 1951.
• Mandatory Disbursement Rule: At least 95% of total contributions received in a financial year must be donated to eligible political parties.
  • The remaining 5% may be used only for administrative expenses.
• Disclosure of Donor Identity: PAN is mandatory for resident Indian contributors.
  • Passport number is required for NRIs at the time of contribution.
• Accounting & Oversight: Trusts must maintain audited accounts, disclosing donors, recipients, and disbursements to the CBDT and the Election Commission of India (ECI).

Recommendations on State Funding

• Constituent Assembly debate: The earliest discussions on the cost of elections were held in the Constituent Assembly in 1948. 
  • They argued in favour of the need for the state/public treasury to bear election expenditure in a regulated, least expensive and organised manner.
• Indrajit Gupta Committee (1998): Supported state funding to level the playing field for all parties.
• Law Commission of India (1999): Advocated for total state funding, conditional on parties not accepting other funds.
• Second Administrative Reforms Commission (2008): Recommended partial state funding to reduce undue financial influence.

Reforms needed in political funding in India

• A comprehensive political finance law should aim to ensure equity, transparency, and accountability across parties.
• Electoral trusts should be mandated to publicly disclose donor–party linkages, enabling informed citizen oversight.
• Political parties should be brought under the Right to Information Act to enhance financial and organisational transparency.

Source: IE