Now nail the netas

When at 8 pm on November 8, Prime Minister Narendra Modi announced on national television that currency notes of Rs 500 and Rs 1,000 denomination would be invalid from midnight, in one fell swoop he dealt a crippling blow to what has been described as "the mother of all corruption in the country"-election funding. "Elections have become the fountainhead of corruption in the country. The voter does not realise that for everyRs 100 that comes, for example, from a candidate as a lure for votes, he or she is likely to end up paying 5-10 times more annually as bribes in availing basic public services that a citizen is entitled to from the government," says a report by the Delhi-based Centre for Media Studies (CMS).

By striking at the root of corruption, Modi hopes to kill two birds with one stone. In the short term, he aims to neutralise the play of black money in the five states-including the most politically significant, Uttar Pradesh - going to polls next year. But the long-term goal is to free Indian politics and governance itself from the vice-like grip of the politician-businessman nexus. "India's political finance reform has been stymied by two major factors: a lack of political will for reform, and an economy in which the state exerts a heavy hand, thus incentivising illicit funding," says E. Sridharan, academic director of the University of Pennsylvania Institute for the Advanced Study of India (UPIASI) in Delhi.

According to CMS, Rs 35,000 crore was spent in the 2014 Lok Sabha elections, which is Rs 2,000 crore more than what the 2016 budget allocated for the health sector. This estimate doesn't include the money changing hands in getting a party nomination as a candidate, as several parties almost openly sell tickets. For instance, in the 2014 Lok Sabha polls, candidates in Uttar Pradesh used nearly Rs 500 crore to get tickets from political parties, organise rallies and to woo voters, claims an officer of the state Election Commission's Financial Intelligence Unit.

However, the official estimate of the expenses for the 2014 Lok Sabha polls is just Rs 7,000-8,000 crore, which means the rest-Rs 27,000 crore-is unaccounted for. A hypothetical calculation explains that across all 4,120 assembly constituencies, candidates spent nearly Rs 12,000 crore of black money.

Though he later retracted his statement, the late BJP minister Gopinath Munde admitted he had spent Rs 8 crore in the 2009 Lok Sabha poll. According to a US diplomatic cable released by Wikileaks, one sitting Lok Sabha member had casually said in 2009 that he would spend an amount equivalent to the legal limit on the day of the election only.

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Modi's opponents have been quick to raise conspiracy theories, the nub of which is that he did this to take the wind out of the sails of the non-BJP parties in the fray in the Uttar Pradesh and Punjab assembly elections while tipping off his own party. They cite the fact that the BJP has deposited huge sums of money in Bengal and recent investments in land in Bihar and elsewhere as evidence. Even the attempt by the prime minister to put his own house in order by asking BJP MPs and MLAs to submit bank account statements of transactions between November 8 and December 31 this year to party chief Amit Shah on January 1, 2017, has been called out as a political gimmick. But it doesn't matter, Modi already seems to have made electoral capital out of it. The BJP has made big gains in the first phase of the Maharashtra municipal council polls, and almost swept the civic byelections in 16 districts of Gujarat, dealing a blow to the Opposition's anti-demonetisation campaign.

It's not hard to understand the general euphoria among common citizens who see Modi's move as a direct attack on the venal politicians who have till now been beyond the clutches of the law. Corruption and politics have walked a parallel course in independent India, the only change being the incredible amounts involved in the scams of late. There have hardly been any convictions either. Of course, a few like the DMK's A. Raja and Kanimozhi, the RJD's Lalu Yadav and AIADMK supremo J. Jayalalithaa have done time in jail, but they were mostly temporary visitors. Many others like Mulayam Singh Yadav and Mayawati, who face disproportionate assets charges, have never been convicted. Modi's demonetisation move, for now, is seen by the public as a surgical strike against the ill-gotten wealth of the mighty politician. In 2014, 165 re-elected Lok Sabha MPs have shown an increase of 137 per cent in their assets.

In the context of the UP and Punjab polls, the timing of Modi's decision seems to be a most crucial factor. "This is the time when cash starts moving because politicians know it will be very difficult once the EC's code of conduct is in place. Now, because of demonetisation, the 'process' may get stuck," says former chief election commissioner S.Y. Quraishi. According to a CMS report, in the 2014 Lok Sabha polls, cash started flowing long before the code of conduct was announced on February 5. Wherever candidates were sure of getting party nominations, they went about disbursing big sums to local mid-level workers or outlets like provision stores, temples, chit fund offices and hawala dealers for distribution down the line.

Even the prime minister's party has not escaped the effects of demonetisation. Insiders say some of the top leaders involved in the UP campaign either stopped or curtailed all movements in the three days after Modi's announcement. Jagdeep Chhokar, founder of the election watch group Association for Democratic Reforms (ADR), says, "If no political party was privy to the demonetisation move, the upcoming assembly elections might be cleaner with less money to lure voters and indulge in high-end campaigning." Indeed, if Modi's move eventually leads to the consequences he anticipates, it could also mean that the 2019 Lok Sabha polls will not see the scale of the mega campaign he had unleashed in the run-up to the 2014 Lok Sabha polls-from touring the entire country in private choppers, the 3D speeches to the unprecedented digital campaign.

OLD HABITS DIE HARD

Politicians and political parties, however, already seem to have devised ways to bypass the effects of demonetisation. Congress Lok Sabha MP Kamal Nath says, "No sane politician or political party hoards cash at home. And as we can see, black money hoarders have already found multiple ways to subvert the demonetisation process. If Modi is really serious about cleaning up elections, he must go in for electoral reforms and not harass common people."

In the Maharashtra municipal polls in November, most candidates bought gold, home appliances and utensils to be gifted to prospective voters. Others started paying the fuel and medicine bills of voters. Some have even paid off bills, like property tax, water tax and electricity. Some voters were even happy to get old currency notes. "I was offered Rs 2,500 per vote in my family of five," says a businessman from Dhule. "They offered old currency notes. We'll deposit them in our bank accounts."

In Assam, the local BJP unit suddenly paid Rs 65,000 in old currency to the landlord whose premises were being used as a party office in the run-up to the byelection for the Lakhimpur Lok Sabha seat on November 19. The houseowner had been pleading with the party for months to clear his dues.

In Bengal, where there are no immediate elections, political leaders are busy converting black by depositing it in Jan Dhan accounts or seeking the help of kabuliwalas and small businessmen, who are ready to exchange the notes for a 20-50 per cent commission. Enforcement Directorate officials believe some 100-odd chit fund companies are conduits, stashing black money in old notes.

In UP and Punjab, all parties, including Modi's own BJP, are depending mostly on credit. "There is a definite crunch when it comes to making payments for food bills, tents, local travels and accommodation. But since the party enjoys high credibility among businessmen, they have agreed to take payments later," says a BJP leader in UP.

Under Section 13A of the Income Tax Act, political parties enjoy 100 per cent tax exemption on all sources of income. This, coupled with the legal provision which says that they don't need to declare source and donor names for cash donations under Rs 20,000, has helped parties withstand demonetisation.

"Demonetisation may hit cash flow in the short run, but parties don't stand to lose money. All we need to do is open a ledger and show backdated cash deposits from unidentified donors," says a senior political leader from Bihar. For instance, if some political party is left with Rs 19 crore of cash in old currency notes, it can convert it into white money by simply marking donations of Rs 19,000 from 10,000 unidentified donors. "The party will claim to have received these donations in the current fiscal and since each donation is under Rs 20,000, it will fly under the scanner," he adds. Once the formalities of making a ledger are completed, the political party will deposit the demonetised notes in the bank and receive legal tender against it.

"In the near term, demonetisation will have a ripple effect on campaign finance but not really on party finance. The five states going to polls, though, will face a serious funds crunch," says Niranjan Sahoo, senior fellow with the Observer Research Foundation who is currently coordinating studies on campaign finance reform. Indeed, Modi's move could have an unintended reverse effect too, helping political parties garner more funds from donors with stashes of demonetised notes to dispense. "Today, there seem to be a lot more willing donors. Contractors, bureaucrats, builders, they all want to put in money in political coffers," says a Delhi-based politician from Bihar.

THE SECRET DONORS

The root of the use of unaccounted money in elections can be traced to the legal structure of political funding which allows parties to rig their books any way they want. "Most business donors take advantage of the provision of not declaring donations under Rs 20,000. This protects them on two counts: their identity remains secret and the black money remains untraceable," says a party treasurer.

According to ADR, between 2005 and 2013, the six national political parties-Congress, BJP, BSP, NCP, CPI and CPI(M)-earned Rs 5,986.32 crore, with 73 per cent of it coming from unknown sources. In 2014-15, the unknown share of funds came down to 60 per cent. The Mayawati-led Bahujan Samaj Party claims it did not receive any donation above Rs 20,000, so it did not any file details of donations. Interestingly, between 2013-2015, BSP's income increased by 67.31 per cent, the highest growth shown by any national party.

Even for donations above Rs 20,000, political parties rarely reveal the name of donors. For example, the Congress did not mention the cheque/DD numbers of 192 donations for Rs 138.98 crore in 2014-15. This was 98 per cent of the total donations above Rs 20,000 to the party.

The Election Commission also doesn't have the power to scrutinise the returns filed by parties. In fact, if they don't want a tax rebate parties are not even bound to file returns. So, the EC can take little action for discrepancies. "The commission still doesn't have power to deregister a party," says Quraishi.

Though there is no limit to spending by a political party during elections, the Election Commission has fixed a cap on expenditure by individual candidates. A candidate is allowed to spend Rs 70 lakh in 533 big constituencies and Rs 54 lakh in 10 small constituencies. According to a veteran Congressman who also works as an unofficial treasurer, a candidate requires at least Rs 10 crore to win in big urban constituencies and Rs 5 crore to win in rural constituencies. Quraishi estimated that in 2009, every candidate on an average spent between Rs 5 crore and Rs 10 crore.

Yet, an examination of the expenditure by candidates in the 2014 Lok Sabha elections shows that they spent only 58 per cent of the cap fixed by EC. In other words, on an average, a candidate spent only Rs 25 lakh. What's ironical is that most parties often claim the cap of Rs 70 lakh is too low. If a candidate's legal expenses exceed the prescribed ceiling, he or she can be unseated from his position and disqualified from contesting elections for a period of six years. "As courts normally take a long time to decide such cases, this remedy too is no curb to funding malpractices," adds the former CEC.

ADR even found mismatches in records of funds allocated by parties to their MPs, and funds received by them from the parties. For example, in the 2009 Lok Sabha elections, out of 277 MPs from six national parties, only 75 MPs declared they had received a total of Rs 7.46 crore from their parties. But the parties in their declaration have said that they have given Rs 14.19 crore to 138 MPs.

Conversely, in the 2014 Lok Sabha polls, out of 342 MPs from national parties, 263 MPs declared that they had received a total of Rs 75.59 crore from their parties. Again, the parties themselves said they had given Rs 55.23 crore only to 175 MPs.

"There are multiple ways to fudge. For instance, when we use helicopters, the charge is usually Rs 3 lakh per hour. But the bill by the company will be shown as Rs 1.25 lakh and it takes the rest in cash. Also if the flying hours were 100, it will be reduced to 50," says a national party leader. That's the reason Quraishi has long advocated a closer scrutiny of the accounts of political parties by independent auditors.

Beyond Lok Sabha and assembly elections-India has a three-tier decentralised political structure-huge amounts of money is getting pumped into panchayat elections which are held across the country for 3 million positions. Between March and May 2014, elections were held in 42 Lok Sabha constituencies, 287 assembly seats, 156 municipalities, 22 zila parishads, 1,096 mandal parishads and 16,589 mandal parishad territorial constituencies. According to CMS, total expenditure in those three months was between Rs 7,000 and Rs 10,000 crore. In those local bodies' elections, candidates spent more than 10-20 times the stipulated limit of Rs 2 lakh. For instance, Rs 100 crore was spent in elections to the Vijayawada Municipal Corporation (with 59 divisions). Within the first three weeks of the poll campaign, more than Rs 100 crore was seized.

LORDS OF LAND AND LIQUOR

The nexus between business and politics began evolving in the 1960s when campaign costs grew exponentially and it became difficult for parties to manage election expenses with just membership contributions and coupon sales. Politicians turned to big business houses, who were happy to pay for the political patronage that helped them manoeuvre through a regulated economy.

In 1969, irked by the swell of corporate support for right-wing opposition parties like the Swatantra and Jana Sangh, Indira Gandhi imposed a ban on corporate donations which was her son Rajiv Gandhi revoked in 1985 allowing companies to legally contribute up to 5 per cent (later raised to 7.5 per cent) of their average net profit of the previous three years.

Post-liberalisation, the two sectors which have remained the big pockets for political funding are real estate and manufacturing, both with land as a core element of business. "As a result of the regulatory restrictions on land, politicians wield an enormous amount of discretionary powers over business activity in sectors for which land is a primary input," says Milan Vaishnav, senior fellow in the South Asia Program at the Carnegie Endowment for International Peace. "They can intervene on behalf of favoured entities to expedite clearances and permits, grant waivers to existing regulations or even alter land use designations."

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This is the reason politicians are key players in the construction industry. It's common knowledge that friends and relatives of politicians often establish their own construction firms. They also use real estate firms to park their black money. A survey of firms conducted by consultancy KPMG in 2011 reports that businesses perceive construction/real estate to be the single-most corrupt industry in India. A close analysis of the liabilities declared by MPs elected in the 2014 Lok Sabha elections shows that several MPs raised big-ticket unsecured loans from many big and small real estate companies. In UP, a top builder who had no political experience became treasurer of a political party. It's no coincidence he got several of his big-ticket projects at prime locations in Lucknow and Noida cleared by the government in no time.

Apart from real estate and manufacturing, another sector which plays a big role in election funding is the liquor business. It's an interesting coincidence that the first political support outside the BJP to the demonetisation move came from Bihar Chief Minister Nitish Kumar who has imposed prohibition in his state. During the 2012 assembly elections, an EC raid on the office of a Noida-based liquor baron unearthed Rs 50 crore in cash. It was alleged that the businessman, known for his close links with the BSP, intended to use the cash during the campaign. By funding campaign expenses, liquor barons gets licences to open shops at prominent locations in the state. The competition is stiff for the 1,000-plus such locations for which government issues licences every two years. "The ruling party gets Rs 50 lakh-Rs 1 crore from the businessman in lieu of every licence," says an insider.

Profits from the liquor trade in Punjab, another state going to the polls next year, are currently pegged at around Rs 15,000 crore, which includes legal and unaccounted earnings from stock that is sold openly without payment of the mandatory excise duty. Officials estimate that Punjab's annual projected liquor revenue earnings are less than a third of the actual profits. A senior excise official who requested anonymity fearing reprisals from the powerful liquor mafia conceded that at least 50 per cent of these illicit profits are channelled back to political masters. A Mohali-based liquor contractor disclosed that the conduit for the black money so earned is usually a relative or someone close to the minister being made a partner in the contract.

CANDIDATE BIGGER THAN PARTY

Election results in India have increasingly become dependent on the money power wielded by individual candidates. In the 2014 Lok Sabha election, the proportion of expenditure by individual candidates went up significantly to around 40 per cent of the total election expenditure. According to research conducted by CMS, there is a perception in certain areas and among certain sections of voters that candidates known otherwise for corruption have better "winning chances". For example, 51 per cent of the voters in Jharkhand think a corrupt image is a plus in an election.

An examination by Carnegie's Vaishnav of the affidavits filed by candidates in the 2004, 2009, and 2014 Lok Sabha elections also explains the importance of money in electoral success. The poorest quintile of candidates, in terms of personal financial assets, had a 1 per cent chance of winning parliamentary elections while the richest quintile had a more than 23 per cent chance. There is also a correlation between criminality, wealth and victory. In the same bandwidth of parliamentary elections, roughly 4 per cent of candidates in the lowest quintile of wealth faced criminal cases compared to nearly 15 per cent of candidates in the top quintile. The average wealth of winning candidates was Rs 3 crore, whereas the average wealth of winners with a criminal record was Rs 4.2 crore. For those with serious criminal records, it went up to Rs 4.4 crore. In 2004, 24 per cent of sitting members of Parliament faced criminal cases (12 per cent faced serious charges); this share grew to 30 per cent in 2009 (15 per cent serious) and 34 per cent (21 per cent serious) in 2014.

FUTURE ROADMAP

Is demonetisation the ultimate weapon to kill black money in politics? The answer is a resounding 'no', and experts say electoral reforms are the only way forward. "Given the kind of discretionary powers that the government and elected officials enjoy over economic and business sectors, they would continue to collect unaccounted money the way they want it. In the absence of broader structural reforms of politics and the electoral system, it is going to be business as usual for political parties and candidates," says Sahoo.

There have been minor alterations to improve election funding-company donations were re-legalised, parties are required to submit tax returns, the campaign period has been shortened from 21 to 14 days, expenditure reporting requirements for candidates has been made mandatory. Yet the fundamentals have remained unchanged.

On August 29, 2014, the Election Commission issued a set of transparency guidelines to political parties by asking them to identify all donors and amounts, except for payments in cash raised at rallies, in a move to plug the loophole of donations under Rs 20,000. However, these guidelines do not have the backing of the full force of the law because other than de-recognition of the party's symbol, the EC has no power to deregister a party violating the new guidelines. "Parties must be heavily penalised in case of non-compliance of the transparency guidelines. They must also regularly submit expenditure statements with the Election Commission during the election process and not 75/90 days after the declaration of results," says ADR founder Chhokar.

This apparent disdain for transparency was evident when political parties rejected the Central Information Commission order of June 3, 2014, bringing them under the purview of the Right to Information Act. "Once they abide by this order, the much-needed transparency in their finances would be automatically accomplished," says Chhokar. The real challenge for Modi would be to convince all political parties, including his own, to implement internal democracy, clean their books and submit themselves to RTI.

The prime minister has been advocating state funding of elections to clean the electoral system. Direct funding of political parties is practised in 86 per cent of the countries in Europe, 71 per cent in Africa, 63 per cent in the Americas and 58 per cent in Asia. Various committees appointed by the government have recommended that state funding of elections should be considered only after some prerequisites are ensured such as internal democracy in political parties and complete transparency in their financial affairs.

According to Sridharan and academician-turned-Congress MP M.V. Rajeev Gowda, state funding based on a transparent formula might encourage a shift towards broad based, small-sum, grassroots financing of parties. Public funding should be introduced to parties in proportion to the amounts they raise openly from identified small-sum private donors. "Without adherence to internal democracy, transparency and accountability, existing party leadership can be expected to deploy public funds for their discretionary use," says Sridharan.

Quraishi bats for the state paying a fixed sum to a party for every vote secured. "If a political party gets, say, one crore votes, he is entitled to state funding of Rs 100 crore at Rs 100 per vote." A study of 'Political Finance Regulations Around the World' by the International Institute of Democracy and Electoral Assistance in 180 countries showed that 71 countries follow the practice of giving state funds based on votes obtained. In India, there is already a provision of partial state funding in the form of free airtime for all national and 34 state parties on Doordarshan and All India Radio.

With demonetisation, Modi may have taken the first step, but to reach a stage of full-fledged state funding and prevent future generation of black money, the prime minister will have to take several bolder decisions. Otherwise, this will go down in history as just another gimmick to earn a temporary political dividend.