The Case of Political Funding in India

UPSC Syllabus Topic: GS Paper 2 – Salient features of the Representation of People’s Act

Introduction

Political funding shapes how democracy works in practice. When access to money is unequal, political competition becomes unequal. In India, private donations dominate political finance, which has created sharp funding asymmetries, weakened electoral fairness, and strengthened the nexus between money and power. Despite repeated reform attempts, weak enforcement, limited transparency, and lack of political will have allowed distortions to persist.

Mechanisms of political funding in India

1. Individual contributions: Political parties can receive voluntary donations from individuals under the Representation of the People Act, 1951. Donations above ₹20,000 must be reported, and anonymous cash donations are capped at ₹2,000. Despite these rules, a large share of party income still comes from unknown or opaque sources.
2. Corporate donations: Corporate funding is permitted under the Companies Act, 2013. The removal of the 7.5 per cent cap on corporate donations in 2017 expanded corporate influence. Companies disclose total political contributions, but they no longer need to name beneficiary parties, which weakens transparency.
3. Electoral trusts: The Electoral Trust Scheme, 2013 allows companies and individuals to donate through registered trusts. Trusts must disclose donors and recipients to authorities and donate at least 95 per cent of funds to parties. However, the public cannot see which company funded which party, limiting scrutiny.
4. Electoral bonds (now scrapped): Electoral bonds enabled anonymous donations through banks. The scheme was struck down by the Supreme Court in February 2024 for violating transparency and the voter’s right to know. Its removal has shifted corporate donations back to electoral trusts.
5. State or public funding: India follows limited indirect public funding. This includes tax exemptions, free media time, and subsidised facilities. Direct public funding has been debated but not implemented due to concerns about misuse and weak party regulation.

What are the major concerns and distortions in political funding in India?

1. Extreme inequality in corporate donations: Between FY 2013-14 and FY 2023-24, direct corporate donations declared by the BJP were at least four times more than all other national parties combined. Its share stood at almost 84.648 per cent, creating a clear imbalance in electoral competition.
2. High concentration through one dominant trust: Among the top ten trusts, Prudent Electoral Trust received 86.38 per cent of the total contributions declared by all trusts between FY 2013-14 and FY 2023-24. During the same period, 75 per cent of Prudent’s disclosed donations went to the BJP, showing strong concentration and skewed distribution.
3. Post-electoral bond shift and sharp surge in trust funding: After the Supreme Court scrapped electoral bonds in February 2024, companies again turned to electoral trusts. Contributions rose from ₹1,218.36 crore in 2023-24 (five trusts) to ₹3,811 crore in 2024-25 (nine trusts), increasing dependence on the trust route.
4. Lack of public visibility of donor–party links: Trusts disclose donors and recipients to the authorities, but the public does not know which company funded which party, because the method of disbursal is not publicly available and is likely left to trust discretion without ample scrutiny. Only the Election Commission and the income tax department can see these links under the 2014 transparency guidelines.
5. Quid pro quo risk and institutionalised corruption concern: Political funding largely flows to parties ruling at the Centre or state level, suggesting a quid pro quo between corporates and ruling parties. The Supreme Court called quid pro quo an instance of institutionalised corruption and said corporate contributions are business transactions made with the intent of securing benefits in return.
6. Unlimited party expenditure and rising election costs: There is no legal ceiling on political party expenditure. This has enabled unlimited spending on more ambitious and professional campaigns, making India’s elections one of the most expensive globally, surpassing even the US elections, and raising entry barriers for less-funded parties and candidates.

What have the Supreme Court and various committees observed or recommended on political funding reforms?

1. Supreme Court on corporate intent: In the electoral bonds judgment, the five-judge Bench stated that corporate political donations are purely business transactions made to secure benefits. It rejected anonymity as incompatible with democratic transparency and the voter’s right to know.
2. Early constitutional concern (1948): The Constituent Assembly discussed election costs in 1948 and argued that elections are a state affair, not a private concern. They warned that unfair advantage to richer candidates must be avoided, and public treasury should bear costs in a regulated and least expensive manner.
3. Indrajit Gupta Committee (1998): The committee supported state funding in principle and recommended limited in-kind public support only for recognised parties, citing fiscal constraints.
4. Law Commission of India (1999): The Commission backed total state funding but only if private donations were banned. It stressed internal party democracy and financial accountability as preconditions.
5. National Commission to Review the Working of the Constitution: The Commission did not support state funding, but agreed that strong regulation of political parties must come first if state funding is ever considered.
6. Second Administrative Reforms Commission (2008): The ARC supported partial public funding to reduce illegal spending and emphasised ethical governance and stronger regulation of party finances.

Way forward

1. Public disclosure of donor–party links: Electoral trusts should publicly disclose which company donated to which party, not only to authorities, so citizens can see the full funding trail. Trust names should indicate the company or group that set them up to strengthen transparency.
2. Curb funding concentration and intermediaries: Reforms must address the dominance of a few donors and trusts, because such concentration of economic power distorts political competition and strengthens unequal access to funds.
3. Introduce party expenditure limits: Legal ceilings on political party spending are essential to control rising election costs and to prevent money from becoming the main determinant of electoral success.
4. Reduce corporate dependence and quid pro quo incentives: Political funding should not rely mainly on corporates donating to ruling parties, because this fuels quid pro quo arrangements and weakens policy neutrality.
5. Conditional approach to state funding: If state funding is introduced, it should be partial, mainly in-kind, and linked to strict compliance with transparency, internal democracy, and audited accounts, so that public funding does not become another route of misuse.
6. Strengthen regulation and accountability of parties: Political parties need stronger oversight on internal functioning, financial reporting, and accountability, so that transparency reforms are enforceable and meaningful.
7. Lower entry barriers and protect electoral competition: A political finance framework must reduce disparities in access to resources, diversify funding sources, and enable candidates without financial strength to contest meaningfully, or citizens will continue to bear the hidden costs of money-driven democracy.

Conclusion

Political funding in India shows deep distortions driven by corporate dominance, high concentration through trusts, opaque donor–party links, quid pro quo risks, and unlimited party spending. Past experience shows bans without alternatives can worsen corruption. A credible path needs full transparency, expenditure control, stronger party regulation, diversified funding, and conditional public support to protect democratic competition and integrity.

Question for practice

Discuss how corporate dominance and weak transparency mechanisms have created major concerns and distortions in political funding in India.

Source: Indian Express