The politico-economic impact of the Bharatiya Janata Party-led National Democratic Alliance (NDA) Government’s de-monetisation decision is being played out since November 8, when Prime Minister Narendra Modi

addressed the nation, announced the illegal tendering of the then Rs 500 and Rs 1,000 denomination notes, and added that these denomination notes would be just scraps of paper by that midnight, barely hours after he took the people into confidence. That the Prime Minister chose to make the announcement himself instead of leaving it to the Finance Ministry, added to the dramatic effect. It also set off a chain reaction, with praise and criticism pouring in. From all accounts, the common man hailed the decision, and so did industry and even some of his political rivals. Other opponents trashed it, with some threatening to mobilise the public on the streets against the move. The Winter Session of Parliament, which began less than two weeks later, too has seen disruption on the issue. Clearly, the jury is still out.

The de-monetisation decision was made to address three major aspects: First, the black money economy, which flourished on high denomination notes; second, high-end corruption, which thrived on the strength of the parallel economy; and third, counterfeit currency, which drove terror funding. These were also issues on which Prime Minister Modi had assured strong action, early into his tenure. It isn't surprising that the common citizen, although hugely inconvenienced by the move (the chaos at banks across the country over the past week is visible proof of this), has been supportive, because he believes the Government has finally cracked down on the wealthy who have stashed away illegal money, on the corrupt and the corrupter, and also on the scourge of terrorism. But there is a fourth angle as well, which is the drying up of dubious funds to fight elections. Polls are round the corner in a few months from now to various State Assemblies, and political parties opposed to the BJP are going round in circles wondering how to manage the money. In desperation they have blamed the ruling party for having used ‘inside information through leaks’ to ‘arrange’ amounts beforehand for itself. In reality, therefore, political parties who have condemned the move on the pretext that the aam aadmi had been severely hit by the Government’s decision and that the move must be rolled back are fighting to retain the black money economy for political gain. One Chief Minister even ridiculously claimed that the black market economy had actually come to the country’s rescue in times of financial crises! It is difficult to believe in the ‘insider information’ theory because, as media reports have highlighted over the days, the Government had maintained absolute secrecy, with just a handful of officials in the know. Even public sector bank chiefs were the dark, and so were most Union Ministers and senior bureaucrats. The political furor has, however served an important function. It has brought focus on the need to reform the electoral system, primarily the funding of elections. Prime Minister Modi, at an all-party meeting a week ago ahead of the Parliament session, strongly pitched for state funding of elections to enhance transparency in public life and combat corruption. He hoped that discussions on de-monetisation would throw up the “positive message” that the country’s political class was united for the public good. Interestingly, the Trinamool Congress representative at the meeting whole-heartedly endorsed the decision, saying his party had always favoured state funding of polls. But the Trinamool Congress has openly criticised the de-monetisation decision and threatened to take to the streets.

Prime Minister Modi’s suggestion of state funding of elections is not a new one, but it acquires significance in the present context of the Union Government’s de-monetisation drive. The Government would like to convey the impression that state funding is one more element in its campaign against corruption. In other words, it wants to go beyond de-monetisation in the coming months. However, while de-monetisation was an executive decision that a Government with the necessary political will could take (this will was lacking in the previous UPA regime), state funding of elections is a trickier issue that needs a broad-based consensus across the political spectrum — which is not easily achievable. It’s good that the Modi Government has at least initiated the process of discussion, though nobody knows when, if at all, it will bear results. But before we get to the issue of state funding of elections, it would be pertinent to note what Chief Election Commissioner of India Nasim Zaidi said nearly a year ago at a conference of South Asian countries on the matter. While welcoming the idea of state funding, he cautioned that even such a move would fail to work unless it was preceded by a strong law to ban illegal money in election campaigns. He said, “We are of the view that a legal ban on adding party and third party expenses in the constituency to the candidates’ overall accounts followed by strong public disclosure and penalties may bring the overall cost down at constituency level (for election related expenditures).” He maintained that the existing rules that regulate donations were not enough to check the proliferation of black money in elections. The Election Commission, he added, “suspects that state funding will become one more additional tool, one more additional source, of funds without reduction of the use of illegal money in election campaign. This in a way can restrict the participation of right-thinking citizens…” This is something that the political class and the Government in particular need to take note of.

Meanwhile, there are divergent views on the efficacy of state funding of elections. The Times of India and its sister publication, The Economic Times, for instance, have been dismissive of the idea, whereas parties such as the BJP (goaded by the Prime Minister) and the Trinamool Congress favour the suggestion. The Times of India has wondered how a Government that is grappling with deficit budgets, can provide money to political parties to contest elections. Using the money collected from the de-monetisation drive for this purpose would be a “travesty” because that would mean more money for politicians at public expense. The daily, in its editorial of November 17, also warned that state funding would encourage every second outfit to get into the political arena merely to avail of state funds. The Economic Times, in an editorial of November 17, called state funding of polls “a very bad idea”. It said, given that state expenditure on key social sectors such as primary healthcare is “pitifully small”, the very idea of the Government giving away money to political parties to contest polls, is revolting. It added sternly, “Public resources have to be channeled towards and not diverted from such essential services, and that, too, to finance something that already gets abundantly financed.” There are two problems with this contention. The first is that there is nothing to indicate that money will be taken away from the social sector to fund elections. The second is that a great proportion of the ‘abundant’ financing political parties receive is illegal money. Once the Government cracks down on it, political parties will need transparent sources of funding to keep the democratic process of free and fair elections going.

When the Prime Minister spoke of the need to push the idea of state funding recently, he was taking forward the first NDA regime’s National Agenda for Governance, which promised sweeping electoral reforms. The Atal Bihari Vajpayee Government had in 1999 constituted a multi-party parliamentary panel under the chairmanship of senior Communist Party of India leader Indrajit Gupta to study the feasibility. Among other members were Dr. Manmohan Singh of the Congress and Somnath Chatterjee of the Communist Party of India (Marxist). In the report submitted to the Union Ministry of Law & Justice as well as to the Union Ministry of Home Affairs, the committee strongly recommended state funding of political parties contesting elections. But it also added that such funding should be limited to parties recognised as ‘national’ or ‘State’ by the Election Commission of India, and to candidates directly fielded by such recognised parties. The panel also believed that while ideally, there must be total state funding of elections, budgetary constraints could come in the way. Therefore, members of the committee broadly concurred with the view that a good start could be made with partial funding — that is, with the state taking care of certain expenditures of the recognised parties. It added that the aim should be to discourage political parties from seeking external funding (except through a nominal membership fee) to run their affairs, carry out their programmes and contest elections. In other words, what we are talking of is not just state funding of elections but state funding of the functioning of political parties, of which contesting an election is just one element.

It is important to delve a little more on the recommendations of the committee, because the suggestions it gave could well be a starting point — even the guiding light — for the renewed demand to move ahead. The panel recommended the creation of a separate Election Fund with an annual contribution of some Rs 600 crore (at the rate of Rs 10 per voter, for the then total of 60 crore voters) by the Centre and a matching amount by all States put together. It also said that only those parties which had submitted their income tax returns up to the previous financial year could avail of state funding. The committee recommended that every candidate of the party eligible for state funding should be given a specified quantity of fuel for vehicles during an election campaign, a specified quantity of paper to prepare electoral literature, and an amplifier system for every Assembly segment of a Lok Sabha constituency, subject to six such sets for each Lok Sabha constituency. Some of these recommendations in some form or the other have been implemented over the years since then, but the crucial issue of state funding has remained unresolved. Back then, there was confusion over the methodology to calculate a candidate’s expenses. According to Explanation(1) to Section 77(1) of the representation of the people Act, 1951, any expense incurred by a political party with regard to an election of a candidate would not be deemed to be expenditure incurred by the candidate for the purpose of determining the ceiling on expenses to be made by the candidate. In other words, the candidate could show any excess expenditure he or she incurs outside the limit set, as that done by his or her political party or organisation. This effectively defeated the very purpose of containing expenses and bringing about transparency, as funding to political parties was, and still is, opaque. The Dinesh Goswami panel in 1999, sought to course-correct here, by suggesting that Explanation (1), be deleted. It said that in the absence of a provision to keep tabs on the campaign expenditures made by a candidate’s political party or friends or organisations, the Explanation provided an escape route to both the candidate and the political party. The Goswami committee also drew attention to the contradiction between the Explanation and Section 171(H) of the Indian Penal Code, which prohibits parties or associations or organisations to indulge in any election campaign expenditure without the candidate's authorisation. Thus, if the candidate is aware, he or she is also liable for action against crossing the legal limits on election expenditure.

The Law Commission of India too had in its 1999 report said that ‘total’ state funding was a desirable goal so long as political parties were prohibited from accepting money from other sources. It also agreed with the Indrajit Gupta panel recommendation that for the moment, a good start can be made through ‘partial’ funding, considering budgetary constraints. But more importantly, like the Election Commission in many ways, it underlined the absolute need to first have a regulatory framework in place with regard to inner-party democracy, internal structures and maintenance of accounts, their audit and submission to the poll panel in time etc. The Second Administrative Reforms Commission in 2008 had also endorsed partial state funding in a bid to check “illegitimate and unnecessary funding” of elections. However, the National Commission to Review the Working of the Constitution, in 2001, had been cool to the idea of state funding, though it agreed with the suggestion that regulatory mechanisms must be put in place to enhance transparency and accountability.

It isn’t India alone that has been struggling with the idea of state funding of political parties; other democracies too have grappled with it. Some like Finland, Italy, Israel, Norway, Canada, the US, Japan, Australia and South Korea implemented the concept with mixed results. Italy, Israel and Finland, for instance, did not see any significant reduction in state expenditures due to public funding, despite the many checks and balances. In most of these countries, the argument against state intervention has been that political parties, being a free association of citizens, are independent entities, and that they cannot be bound by financial strictures. It’s an argument that can well be applied to India by anti-state interventionists.

Back then, Prime Minister Atal Bihari Vajpayee was in general agreement with the recommendations the all-party panel had arrived at, but given the fractious nature of Indian politics, those recommendations could not become law. It is now to be seen if Prime Minister Modi, from the same NDA stable, is able to make substantial progress. After all, politics now is as fractious, if not more, than in 1999. The only difference is that Modi’ BJP has a decisive majority in the Lok Sabha, although the Prime Minister manages a coalition Government. Perhaps this decisiveness has given him the strength to take out-of-the-box measures such as the demonetisation drive. And perhaps we will this time around see serious efforts at reforming the electoral system, particularly on the matter of funding of political parties and elections. However, such efforts will have greater credibility if we have in place institutional mechanisms such as the Lokpal which, in some ways, is supposed to be the sentinel that state funding of polls is expected to be as well.

(The writer is Opinion Editor of The Pioneer, senior political commentator and public affairs analyst)