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Funding of Political Parties: A Brief Note

Strong political parties are essential to open, competitive democratic politics, particularly in emerging democracies. Parties need funding in order to survive, compete, and perform their democratic functions, both during and between election campaigns. Yet political money and those who donate it are widely seen as problematic—at times, even, as threats to democracy. There is no consensus on how parties should be funded, or on the regulation of contributions, expenditures, and public disclosure.

It is worth noting that the risk of corruption and political finance abuses must be taken seriously, too, particularly where institutions are weak. Beyond a certain point, money enables some voices to overwhelm others. Parties with insufficient resources cannot build popular participation. Parties with excessive resources may drive out competitors while becoming isolated from their own social bases. Parties funded from too few sources will fail to represent broad segments of the public. Governing parties can tap into “administrative resources”—state powers and funds not available to the opposition—which are very useful in rewarding friends and punishing enemies. Party leaders, particularly in strongly disciplined parliamentary systems, can establish personal monopolies over funding, enriching themselves, stifling intraparty debate, and putting extortionate pressures upon contributors in the process; entrenched incumbents in other kinds of systems can practice similar tactics. In established democracies, influence markets emerge in which parties and politicians function as middlemen between private interests and decision makers—for a price. In this regard preventing or revealing abuses are important.


Our main concern is how to strike a working balance among all of these initiatives—by making active political contention and strong party politics our standard of progress and ultimate goal. The case for transparency in political finance has been made with force and sophistication in many studies done by various organizations. For example, the USAID Money in Politics Handbook deals with this issue extensively.


Indian Scenario

2012 marks 60 years since the first Indian general election.  The spirit of democracy has been celebrated by the citizens in form of participating in these elections in one way or other. However, it’s really unfortunate that elections have become perhaps the biggest source of corruption in the country. Inevitably, the proceeds of corruption worms its way into funding election campaigns. So much so, that the National Commission to Review the Working of the Constitution, 2001 noted that “electoral compulsions for funds become the foundation of the whole superstructure of corruption”. The role of money power in elections has thereby become a standard concern in recent discourses on electoral reforms in India and belongs to that category of maladies, which are systemic in origin.

Various efforts were undertaken by different institutions, committees and organizations in terms of laws and recommendations. Few worthy mentions are:

  1. Santhanam Committee’s recommendations in 1964 and Wanchoo Committee’s recommendations in 1973. The former in its report had observed that the existence of a large amount of unaccounted black money was a major source of corruption. Both recommended for state funding of political parties.
  2. The Indian Electoral Law, under Section 77 of the Representation of People’s Act (RPA), 1951, requires that all candidates should disclose the correct account of all the expenditure incurred in connection with the elections and that they are bound to submit the accounts between the day on which they have been nominated for election and the day of declaration of the result thereof. Furthermore, Section 123(6) of the Act defines incurring of excessive expenditure in elections as a corrupt practice. It also lays down a limit on expenditure on elections.
  3. The maximum amount of election expenditure, which may be incurred by the candidate in the various states, has been laid down under Rule 90 of the Conduct of Elections Rules, 1961.
  4. In addition, failure to furnish an account of election expenses within the time limit prescribed under Section 77(6) of the Act 1951 can lead to disqualification of membership to the parliament or state legislature.
  5. The Supreme Court in many cases had occasions to deal with the question, as to whether expenses incurred by a political party or a candidate falls within Section 123 clause 6, read with Section 77 of the RPA, 1951. The Supreme Court in the famous Kanwarlal Gupta vs Amarnath Chawla (1975 (3) SCC 646) case expressed the view that the expenses incurred by a political party should be included in the candidate’s election expenditure.
  6. As fallout of the Supreme Court judgment in the above-mentioned case, the RPA was amended, so as to nullify the 1975 Supreme Court judgment. Explanation 1 to Section 77 of the RPA was appended, by which, unauthorised party and supporter expenditure in support of the candidate did not count in election expenses incurred by a candidate, for the purpose of ceiling, making the limit an exercise in futility. Additionally, the Supreme Court, in its recent judgments, viz, C Narayanswamy vs C K Jaffer Sharief (1994 (SUPP) 3 SCC 170), Ghadakh Yeshwantrao vs Balasaheb Vikhe Patil (1994 (1) SCC 682) and Gajanan Bapat vs Dattaji Meghe (1995 (5) SCC 437) has also reiterated the need to delete explanation 1 to Section 77 of the Act. It has thereby exhorted the legislature and the Election Commission to supervise the maintenance of receipt and expenditure incurred by political parties and also disclose the funds received by them.
  7. Law Commission of India, in its working paper on electoral laws has also wholeheartedly reiterated the proposal contained in the 1990 bill, introduced by the government of India in the Rajya Sabha, to delete explanation 1 to Section 77 of the RPA, 1951. The commission has also stressed the need for monitoring expenditure incurred by political parties, without which the evil of excess election expenditure cannot be solved. The pre-1975 position however remains to this day.
  8. In 1992 Election Commission in its proposal submitted to Government of India suggested strongly that every political party should publish its annual account and EC should be allowed to audit it.
  9. In the realm of corporate financing, the Indian Companies Act prior to 1969 did not make any specific provision for donation by companies, but in 1969 a law was brought into force, banning any company contribution to the election arena. Later, Section 293, an amendment brought about in 1985, permitted companies to make contributions to charitable and other funds up to 5 per cent of their average profit of the three previous years. This amendment, brought in with the view of curbing the parallel practice of black marketing in the business-politics nexus (rampant in the era of briefcase politics), has in fact turned volte-face and has been replaced by a lack of transparency and nepotism.


The above measures were instrumental in channeling the electoral reforms in the field of political party funding. However, there are still many problems that have been plaguing this field giving rise to concerns of monumental political corruption. Facts reveal that mere directives and enforcement by the Election Commission and Supreme Court have proved to be insufficient. In about 2008, pursuant an order of the Chief Information Commission declaring political parties as ‘public authorities’, the parties submitted detailed balance sheets indicating the availability of funds, income and expenditure incurred by them. The results reveal that national parties like the Congress and BJP had incomes of Rs240 and 220 Crore respectively in the year 2010. This figure is measly when compared to the fact that the Election Commission itself estimated that over Rs.3500 Crores ($750 million) was paid in bribes during the elections in five Indian states in April and May 2011.

In the wake of above efforts there are three major reforms suggested by various government, non-governmental bodies and individuals. Three such proposals ought to be highlighted.

Firstly, an argument for state funded elections. In 1998, the Indrajit Gupta Committee on State Funding of Elections backed the idea of state funded elections stating that it saw “full justification, constitutional, legal as well as on grounds of public interest, for a grant of state subvention to political parties so as to establish such conditions where even the parties with the modest financial resources may be able to compete with those who have superior financial resources”. Such recommendations, in some form or the other, were later also approved by the Law Commission of India in 1999, National Commission to Review the Working of the Constitution in 2001 and the Second Administrative Reforms Commission in 2008. In fact, Mr. Salman Khurshid, the Union Minister for Law and Justice, informed the Lok Sabha on Nov. 28, 2011 that a ‘Group of Ministers’(GOM) had been constituted by the central government to look into the introduction of state funding of elections.

Such proposals would involve the Election Commission or any other state body giving each party requisite fund to run day-to-day services and election campaigns in the country. Across the world, such measures were first introduced by West Germany in 1959 and today over 75 countries, including more than 90% of the European Union have provisions for state funded elections. According to the Election Commission in India, however, such a proposal may be futile, as to address the real issues, radical changes are required in the laws regarding receipts of funds by political parties and the manner in which they spend such funds.

Secondly, an argument for regulation and close monitoring of corporate financing of elections and political parties. Currently, the Companies Act, 1956 allows for companies to donate as much as 5% of their net profit to political parties. Such donations also enjoy tax exemptions. In order to ensure a degree of transparency in such funding, the Representation of People Act, 1951 states that political parties are required to submit details of contributions received in excess of Rs 20,000 from any individual, group or company. Nevertheless, by the admission of the Election Commission itself, such measures haven’t been adequate in addressing corporate corruption and financing of political parties. Despite the presence of strong corporate laws, Companies still manage to squeeze out crores in bribes. What is required are elaborate laws that can effectively monitor corporate donations, bribes and black money paid by corporates to political parties- unlawful actions that companies manage to undertake with ease under the current laws.

It is also quite ironic that on the one side the ruling government has formed committees and vehemently argued for state funded elections, while on the other hand, in December 2011, the Government introduced the Companies Bill, 2011, which in one of its provisions has suggests increasing corporate funding to political parties from 5% to 7.5% of the net profit earned by a company.

The third proposal would involve the maintenance of accounts by the candidate and the political party. Currently, the spending limits by a candidate include Rs 40 lakh for campaigning for a Lok Sabha seat and Rs 16 lakh for a state election. However, the National Commission to Review the Working of the Constitution, 2001 noted that “the campaign expenditure by candidates is in the range of about 20 to 30 times the legal limits”. The flaw in the current law is that while under Section 77 of the Representation of People’s Act, 1951, a candidate is to maintain a correct account of all expenditures relating to the election, the explanation to the section excludes the expenditure incurred by his/her political party on this account. Thus, candidates contesting elections are easily able to show that they are within the prescribed limit while the political party has incurred massive expenditures for the same purpose.

All the above three proposals need to be deliberated upon and we need to identify to what extent they can be incorporated given the peculiarities of the socio-economic conditions prevailing in India. A recent welcome step in this direction was seen in the recently concluded elections of the five states when Income tax officers were employed to monitor expenditures by candidates with each candidate being asked to open separate bank accounts for election expenses.