India’s New ‘Electoral Bonds’ Aim to Clean Up Campaign Financing

(Bloomberg) -- Indian Finance Minister Arun Jaitley has proposed the creation of new "electoral bonds" to clean up election financing in the world’s most populous democracy. 

Although called a bond, it may not imply an interest-paying debt instrument. They are likely to resemble promissory notes backed by the nation’s central bank, with lenders remaining the custodian of the donor’s funds until the political parties are paid, said a person familiar with the matter, who asked not be identified because the details aren’t public. 

While the new rules -- details of which are still being worked out -- may burnish Prime Minister Narendra Modi’s anti-corruption credentials ahead of state elections, they may not have much impact on India’s chaotic democracy because they will not fundamentally alter the anonymous nature of the vast majority of India’s political contributions. The changes could help drag India’s cash-based election finance system into the digital era.

"There is no question that the proposals are aimed at maintaining the moral high ground without inflicting too much pain on the political class," said Milan Vaishnav, a senior fellow for South Asia at the Carnegie Endowment for International Peace. 

The instrument, unveiled in Jaitley’s budget speech on Wednesday, would allow donors to pay political parties using banks as an intermediary. The announcements are part of an effort to "cleanse the system" of campaign financing, Jaitley told parliament.

Bonds

The announcement, which Jaitley said will require an amendment to the RBI Act, follows Modi’s push to ban high currency notes and flush the system of corrupt "black money." 

The government came under criticism after the cash ban led to hardship for millions of Indians but did not address an opaque funding process that defies close scrutiny between large corporate houses, wealthy businessmen and political parties.

A finance ministry spokesman declined to comment on Thursday. The RBI did not respond to an e-mail asking why the RBI Act needed to be amended.

In an interview with India’s Mint newspaper, Jaitley said the bonds were designed to enable anonymous digital payments among the masses.

"All donors that we spoke to said they hate to pay in cash but their identity should be concealed," Jaitley said. “Rather than taking donations from a handful, let a million people pay digitally."

Electoral Reform

Election financing has been a consistent source of corruption in India. Nearly 70 percent of the 113 billion rupees in party funding over an 11-year period came from unknown sources, the Association for Democratic Reforms said in a report. 

Craig Jeffrey, director of the Australia India Institute at the University of Melbourne, said corruption in electoral finance in India is widespread. The anti-corruption measure will play well with voters ahead of an important state election in Uttar Pradesh and in the lead up to the general election in 2019, Jeffrey said, adding the bonds could be an innovative solution.

"To my knowledge, it’s completely unprecedented," he said. "One wonders, with the central elections now just over two years away, whether Modi sees this as a way of playing to his core base."

‘Baby Step’

In his speech, Jaitley said he was following the Election Commission’s recommendation to cap cash donations at 2,000 rupees instead of 20,000 rupees, while allowing parties to receive digital donations. However, it’s unclear whether the new rules will work.

Carnegie’s Vaishnav said the new 2,000 rupee cap will simply lead to parties registering many more smaller cash donations. 

"This is a baby step," said Anil Verma, national coordinator for the Association of Democratic Reforms, suggesting companies could still contribute anonymously. "Whether it can impart the degree of transparency that we are looking for, is still to be seen."

To contact the reporters on this story: Iain Marlow in New Delhi at imarlow1@bloomberg.net, Anirban Nag in Mumbai at anag8@bloomberg.net. To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Arijit Ghosh