The Murky World of Electoral Bonds: Corruption, Cronyism and Erosion of Economic Justice

Labelled as the biggest scam in democratic India, prompting discussions around crony capitalism, corruption, and quid pro quo arrangements, electoral bonds were introduced for a juxtaposing purpose. Introduced in the Union Budget of 2017-2018 for "cleansing the system of political funding in the country," these bonds were declared "unconstitutional" by the Supreme Court of India in February 2024, finding them "violative of RTI (Right to Information)" and voters' right to know about political funding. The irony is stark. Arun Jaitley, Former Finance Minister, while introducing the scheme in 2017, promised transparency. However, seven years later, the scheme was challenged in the Supreme Court over concerns about the transparency they promised. Prashant Bhushan, a lawyer representing the petitioners, argued that "electoral bonds provide anonymity to donors and reduce transparency in political funding." A polarised debate surrounds this scheme, with the government touting them as a reform to enhance transparency, while critics argue they reduce transparency and enable anonymous donations that can be misused.

So, were these instruments of political funding a necessary step towards clean political funding or a dangerous leap enabling unprecedented corruption?

Elections are expensive, requiring substantial funds for political parties to run campaigns. Success often hinges on a party's ability to raise and spend a significant amount of money, making political funding very important. However, how this funding is raised and used remains contentious, with concerns about corruption, undue influence, and a skewed playing field.

The pre-2018 system lacked transparency, offered potential for abuse, allowed foreign influence, and had an unregulated flow of black money, leading to calls for reform. In an attempt to address these concerns, the government introduced electoral bonds, a unique financial instrument, in 2018 to facilitate political funding. The key concept was to provide a mechanism for anonymous donations to political parties. Under the scheme, any Indian citizen or company could purchase these bonds from select branches of the State Bank of India in denominations ranging from ₹1,000 to ₹1 crore. These bearer bonds did not carry the name of the donor, allowing for anonymous contributions. The bonds were valid for only 15 days, during which the recipient political party could encash them by depositing them into their verified bank accounts.

The RBI, led by then-Governor Raghuram Rajan, expressed concerns about the anonymity of the bonds potentially facilitating the flow of black money into political funding. The ECI raised issues regarding the compromise of electoral transparency and the potential for the scheme to be exploited to circumvent existing laws and regulations. Critics highlighted the irony that the electoral bonds, which were marketed for their transparency, would ultimately be withdrawn for the same. Despite these warnings from key oversight institutions, the government pushed ahead with the implementation of the electoral bond scheme in 2018. This opaque system of electoral bonds went against the fundamental democratic rights of voters to be aware of the source of funding for the political parties.[1] 

Electoral bonds, which provided tax exemptions under Sections 80GGB and 80GGC of the Income Tax Act, may be used as a means for tax evasion. While no explicit data links these bonds directly to tax evasion, corporations may exploit these tax exemptions by misreporting or concealing donations, using shell companies, and laundering money. These practices obscure the true source of funds and evade regulatory scrutiny.

But why do businesses and individuals donate to political parties? Businesses and politics are two interdependent entities. A mix of influence-seeking, access, anonymity, and political pressure drives businesses to donate to political parties in India, despite the risks of potential misuse and cronyism.The large anonymous donations by corporations enable corporates to get undue influence over political parties. This can take the form of policies being crafted to benefit these corporate houses while the public suffers losses. This anonymity facilitates a system of kickbacks. Companies donating hugely to certain parties expecting favors later such as bypassing bureaucratic hurdles or receiving lax enforcement of law. For example, Vedanta Limited, a mining company received an increased amount of government contracts in spite of the financial troubles the company was plagued with. There is circumstantial evidence suggesting this was attributed to their donations to electoral bonds. The anonymity of the electoral bonds allowed companies to make political donations without public scrutiny, enabling backdoor lobbying. Consequently, economic inefficiencies arise. This happens because the companies invest more in lobbying, focusing on regulatory shortcuts rather than innovation and productivity, leading to a misallocation of resources. Moreover, the close relationship between government regulators and corporations can result in inadequate regulation and enforcement.

However, the process claimed as ‘anonymous’ was not so anonymous after all. The Ruling party had access to donor data from the very beginning. This asymmetry in political funding and the playing ground raised concerns that the Electoral Bond Scheme was undermining the integrity of India's democratic process. Economic justice, a fundamental pillar of a fair and sustainable economic system, is often hard to realize due to skewed policymaking resulting from political funding influences. This distortion manifests in several ways, compounding income inequalities, creating opportunity disparities and eternizing regional economic imbalances. When policies favour large donors, it can lead to reduced social mobility and increased economic polarization leading to limited opportunities for those without political connections. This also promotes resource allocation in a way that neglects long-term sustainability potentially burdening future generations with economic costs. This misallocation of public resources due to political influence can affect access to essential healthcare and education, particularly for marginalized communities. Fair competition, the cornerstone of economic justice is undermined, compromising the principle of meritocracy.

In view of the above, the Supreme Court struck down the electoral bonds scheme on February 15, 2024, declaring the bonds unconstitutional, addresses both legal problems as well as economic implications. The electoral bonds' journey from solution to controversy highlights the delicately linked relationship between political funding to economic outcomes.

The challenge now lies in developing a political funding system that ensures transparency and promotes economic justice and sustainable growth. This episode underscores the importance of robust economic governance in a democracy. It serves as a cautionary tale about unintended consequences and the need for thorough scrutiny of reform.

Citation

A complete timeline of the Electoral Bond Scheme. Supreme Court Observer. (2024a, May 14). https://www.scobserver.in/journal/a-complete-timeline-of-the-electoral-bond-scheme/

Constitutionality of the Electoral Bond Scheme. Supreme Court Observer. (2024b, March 21). https://www.scobserver.in/cases/association-for-democratic-reforms-electoral-bonds-case-background/amp

Disclosure of electoral bonds. (n.d.-a). https://www.eci.gov.in/disclosure-of-electoral-bonds

Electoral-bonds-writ-petition-by-association-for- ... (n.d.-b). https://www.scobserver.in/wp-content/uploads/2021/10/Electoral-Bonds-Writ-Petition-by-Association-for-Democratic-Reforms-ADR.pdf

Sharma, Y. (2024a, April 4). India’s electoral bonds laundry: “Corrupt” firms paid parties, got cleansed. Al Jazeera. https://www.thehindu.com/news/national/telangana/electoral-bonds-biggest-scam-ever-in-the-country/article68091579.ece#:~:text=Contracts%20and%20projects%20worth%20lakhs,under%20court%20monitoring%2C%20he%20said.

Sharma, Y. (2024b, April 4). India’s electoral bonds laundry: “corrupt” firms paid parties, got cleansed. Al Jazeera. https://www.aljazeera.com/news/2024/4/4/indias-electoral-bonds-laundry-corrupt-firms-paid-parties-got-cleansed

The big question: Is lobbying bad for the economy?. The University of Chicago Booth School of Business. (n.d.). https://www.chicagobooth.edu/review/big-question-lobbying-bad-economy

Corporate political spending is bad business. Harvard Business Review. (2021, December 15). https://hbr.org/2022/01/corporate-political-spending-is-bad-business#:~:text=Thus%20corporate%20political%20spending%20has,long%20for%20the%20old%20rules.&text=These%20conditions%20are%20exacerbated%20by,EESG%20and%20corporate%20social%20responsibility