Indian elections have long been celebrated as a festival of democracy—in part for their sheer and increasing scale, with over 900 million voters and thousands of political parties registered. Election expenditures have also been on the rise. India’s last national elections were the most expensive elections ever held anywhere in the world, with an estimated expenditure of Rs. 55,000 crores ($7.74 billion)—much of which was financed through private donations. In India as elsewhere, all this private money in politics raises concerns about corruption, both legal and illegal. This problem is exacerbated by a lack of transparency.

Under the rules as they existed until two years ago, individuals and domestic for-profit companies could contribute to political parties via cash, check, or demand drafts. Political parties are required to file an annual income statement, listing both sources of income and expenditures, with the Election Commission, a constitutional oversight body. These statements are publicly accessible under India’s Right to Information law. However, contributions below Rs. 20,000 ($280) could be anonymous, and political parties traditionally exploited this loophole to avoid disclosure of donors. The total share of income from unknown sources has been steadily increasing for all six major political parties, and in the last returns filed for 2017-18, income from unknown sources was over half (51.38%) of these parties’ collective income.

Over the past two years, there have been several reforms to campaign finance. The most significant reform has been the replacement of cash donations with a new mechanism for political donations, so-called “electoral bonds.” Under this system, the threshold for anonymous cash donations was reduced by a factor of ten, but private parties can now make anonymous donations via a bond with the State Bank of India (a public sector bank) in fixed denominations ranging from Rs. 1,000 ($15) to Rs. 1 crore ($1.5 million), during allotted windows. These donations remain anonymous not only to the general public, but also to the recipient political party.

The stated objective of these reforms is to target the practice of money laundering in campaign finance and increase transparency. In a previous post on this blog, written shortly after the new scheme was introduced, Abhinav Sekhri argued with cautious optimism that this tool, though imperfect, was indeed a step in the right direction. I disagree. In fact, the electoral bond system has decreased transparency and increased the potential for corruption, for several reasons:

First of all, the overall package of campaign finance reforms has decreased rather than increased overall transparency. Under the electoral bond scheme, it’s possible, and least in theory, for parties to keep all of their donors anonymous by receiving 100% of their income from unknown sources via electoral bonds. This was not the case earlier, where only donations below $280 could be anonymous. But the problem is much worse when one considers the other “reforms” that accompanied the introduction of the electoral bond scheme. Recent amendments to the Foreign Contribution Regulation Act now allow foreign-owned companies to contribute to political parties, and an earlier cap on contributions from domestic companies has also been removed. Further, the requirement that corporations reveal political donations in their annual profit and loss statements has also been relaxed.

Perhaps even more importantly, the electoral bond scheme creates not full transparency, but rather asymmetric transparency, for two reasons:

• First, these bonds are not, in fact, fully anonymous. The State Bank of India, which is the sole processor of these bonds, has a record of both the donor and the final recipient. This was not emphasized by the government and has only come to light recently through information sought under the Right to Information Act.
• Second, the confidentiality of the donor information is subject to an important exception for when the information is “demanded by a competent court or upon registration of criminal case by any law enforcement agency.” This ambiguous framing grants sweeping powers and discretion to law enforcement agencies, which have a troubling history of being politicized by the ruling party.

So, law enforcement and government agencies will have access to the paper trail, but it will be hidden from the public, opposition parties, tax department, and even the Election Commission of India.

Taking all this together, the reality is that India has enabled large-scale anonymous donations via shell companies in tax havens explicitly set up for this purpose. At a time when Western liberal democracies are grappling with the corrupting influence of big money in politics, India has just opened the floodgates, and done it in a way that shuts out any kind of oversight. It’s a great deal for a billionaire who wants to convert her black money into white money and reap political favours without any scrutiny while doing so. It is terrible news for democracy and voters.

The emerging data on the use of electoral bonds in recent elections confirms these fears. Nearly all total donations, and 93% of the electoral bonds purchased, were in the highest two denominations. Additionally, the ruling party (the Bhartiya Janta Party, or BJP) has been by far the biggest beneficiary of donations via electoral bonds, with a whopping 94.5% of the share of total donations by electoral bonds. This evidence indicates increases in large-scale anonymous donations in favor of the ruling party. This so-called “reform” poses huge challenges to the integrity of Indian elections, and if not rescinded, threaten to corrupt the world’s largest democracy.