The Supreme Court declared the Electoral Bonds (EB) scheme unconstitutional on February 15 and ordered the Election Commission of India (ECI) to provide the names of individuals and business entities that have contributed the specified sum to political parties. This decision has sparked renewed discussions surrounding electoral bonds in India's political and social spheres. The opponents point out favouritism for the ruling party and the fundamental lack of transparency in the entire funding structure, while the supporters contend that these bonds are crucial for battling black money and bringing transparency to the political funding mechanism. The subject has drawn a lot of attention in the past several days. The effects of electoral bonds on our economy and how they operate are still not well grasped by many individuals and policymakers. This article attempts to analyse the economic ramifications of EB.

What are electoral bonds?
The government of India introduced the EB scheme on January 2, 2018, but the first tranche of EB could be purchased from March 1, 2018. EB has been a major funding source, mainly due to the anonymity of donors. Since the bonds bore neither the name of the issuer nor the political party to which they were issued, they functioned as a designated financial instrument that permitted private citizens and corporate entities to donate money to political parties covertly. Before that, the UPA government had introduced the Electoral Trust (ET) scheme in 2013. Both schemes facilitated corporations' and individuals' donations to political parties. The EB scheme seeks to ensure anonymity for the donor; however, ET, the earlier scheme, was supposed to submit the details of contributions received by the parties every year to the Election Commission of India. Before the electoral bonds, the political parties could accept only Rs 20,000 anonymously. In addition, the companies could not donate beyond 7.5 percent of their total profits.

The EB was structured as interest-free bearer bonds or money instruments available for purchase to entities, companies, or individuals at specified State Bank of India (SBI) branches across the country. They were issued in various denominations of Rs 1,000, Rs 10,000, Rs 1 lakh, Rs 10 lakh and Rs 1 crore. To buy these bonds, the buyer (company or individual) had to adhere to all existing KYC regulations and could make payments only through a bank account. EB did not disclose the payee’s names or any other information; their validity was only 15 days.

Donations to political parties registered under Section 29A of the Representation of the Peoples Act, 1951, which must have received at least one percent of all votes cast in the most recent general election (either the Lok Sabha or Legislative Assembly), may be made with these bonds during this time. Additionally, the bonds were be on sale for ten days in each of the following months: January, April, July, and October, with an extra 30 days during the year of the Lok Sabha general elections, all at the discretion of the central government. A corporation or an individual could buy any quantity of EB.

Party-wise funding
As per the affidavit that SBI submitted to SC on March 13, 2024, around 22,217 EB were issued by SBI between April 2019 and February 15, 2024. Political parties redeemed 22,030 of these bonds, with the remaining 187 repaid to the Prime Minister's National Relief Fund. ECI made public new details on EB purchased by people and redeemed by parties; the 1st list was published on 14th March and the second list came on March 17, 2024. Since the inception of the EB scheme in 2018, Bhartiya Janata Party (BJP) has received the maximum amount of funds, totalling Rs. 6,986.5 crore. The next highest funding recipients were Trinamool Congress (TMC) with Rs 1,397 crore, followed by the Congress party with Rs 1,334 crore and Bharat Rashtra Samithi (BRS) with Rs 1,322 crore. Between 2019 and 2024, these four parties received more than Rs 10,000 crore funding.

The other major beneficiaries of these schemes were Biju Janta Dal (BJD) with Rs 944 crore, Dravida MunnetraKazhagam (DMK) with Rs 657 crore, and Yuvajana Sramika Rythu Congress Party with Rs 443 crore. The National Conference, All India Anna Dravida Munnetra Kazhagam (AIADMK), Akali Dal, Samajwadi Party (SP) and Telugu Desam Party (TDP) are the other parties also received funding from EB.

One significant point in this context is that most of the BJP's contributions came in the form of bonds with the highest denomination — Rs 1 crore. and the percent share of Rs 1 crore bonds increased from 52.7% in 2019 to 90.9% in 2024. While for the other parties, the share of Rs 1 crore bonds was 26.7% in 2019 but since then, it has accounted for the majority of donations every year.

The panel's disclosure of EB buyers reveals a mix of entities from reputable business conglomerates such as Vedanta Ltd., Grasim Industries, Bharti Airtel, Apollo Tyres and Piramal Enterprises among others, alongside those of questionable repute like Future Gaming and Hotel Services PR and Megha Engineering.

Economics Issue
If a significant portion of funds is allocated to political parties, there's a risk that they may prioritise electoral gains over capital projects. To gain more votes in the election, the parties would utilise it as per their discretion. This could undermine the effectiveness of monetary policy in ensuring economic stability. Private funding of this kind would increase the opportunity for corruption in India. Concentration of funds among the ruling parties would widen inequality in the country by benefitting a small number of businesses and individuals to profit from essential projects and government schemes, fostering monopolies that are detrimental to the spirit of our economy. Moreover, this skewed distribution of funds exacerbates information asymmetry, further challenging transparency and fairness eventually leading to ‘might is right’, eroding the principles of democracy.

The SC’s intervention in mandating increased transparency measures surrounding EB is a crucial step towards addressing these concerns. By promoting transparency and accountability in political funding, the SC's action helps to safeguard democratic principles and ensures a level-playing field in the economic landscape. This, in turn, enables the RBI to implement monetary policy more effectively, fostering a conducive environment for sustainable economic growth and development.

Dr. Kedar Vishnu is an Assistant Professor of Economics at Narsee Monjee Institute of Management Studies, Mumbai and
Dr. Vaishnavi Sharma is an Economist with a PhD from Indira Gandhi Institute of Development Research (IGIDR), Mumbai.