Economic uncertainty during elections

The 17th Lok Sabha Election was just concluded. More than 400 political parties (464 in 2014) competed for nearly 900 million voters. Conducting elections in the world’s largest democracy is an immense undertaking for which a huge expenditure is borne not only by the central and state governments, but also by the political parties for their candidates. The expenditure for conducting elections is borne by the central government and the expenditure on law & order maintenance is borne by the state governments.

As per the available data, the central government expenditure in the 1st general elections conducted in FY52 was around ₹104.5 million, the amount has since increased to ₹38.70 billion in 2014. Over 8,000 candidates contested the elections and each candidate could spend a maximum of ₹7 million for Lok Sabha elections in all the states except in Arunachal Pradesh, Goa and Sikkim. All the above statistics indicate the scale of expenditure that occurs during the elections.

Theories of political business cycle in different economies show that occurrence of elections weighs on the economy and certain macroeconomic variables do portray a distinct pattern/trend. This is because there is an environment of uncertainty and risk as well as opportunity associated with elections. There is uncertainty over the election outcome and risks associated with the nature of policy formation as often large projects are stuck over policy deliberations. It would be insightful to understand the trajectory of some parameters of Indian economy during elections. To detect the trend, we have observed the movement of some of the variables during the election years and compared it with the trend in the non-election years. We have also observed that some variables follow a particular trend during the election year which is not noticed during the non-election years.

Increase in government expenditure during elections

The expenditure incurred by the government during the budget is reflected in the Government Final Consumption Expenditure (GFCE). The growth rate of GFCE during two quarters prior to elections (Oct-Mar) is higher than the average growth rate during non-election years (with the exception in 2014).The governments’ non-plan revenue expenditure is significantly higher during the election period (Apr-May) compared to non-election years. This could be attributed to subsidies, economic and social services undertaken during the elections. The recently announced debt waivers and income support to marginal farmers project a similar trend for 2019.

Impact on currency and inflation

During the observed period, in five out of seven full-term elections since 1972, currency with public registered a higher growth rate in the period (end-Mar) prior to the election months, which is not witnessed during the non-election years. It has also been observed that agricultural wages grow at higher rate in the run up to the election period (Jan-Mar) when compared to non-election years. During the election years, the wage growth remains high prior to (Jan-Mar) and during the election period (Apr) and stabilizes post-election (Jun-Aug). While farm incomes are impacted by several factors like crop output, minimum support prices and market prices, a nearly two-fold increase in growth rate of wages in the last two election periods does stand out.

The election period is usually marked by a higher inflation rate. Election related spending prior to elections stokes inflationary pressures during the actual election period (Apr-Jun). CPI (IW) inflation generally inches up during election period and eases in the following quarter. This trend is not observed during the non-election years.

Impact on industrial production, consumption and investment inflows

The uncertainty regarding elections is mirrored in the optimism level of businesses. Dun & Bradstreet’s quarterly business optimism index (BOI) remains subdued prior to (Jan-Mar) the election period and rises substantially post elections. The muted optimism is also reflected in the growth of industrial output (IIP), which is considerably lower in Jan-Mar period during election years compared to non-election years. Growth in IIP picks up after elections.

Despite the uncertainty, the election period also presents an opportunity to leverage on the higher level of consumption during elections. Generally, it is observed that growth in net sales of domestic appliances are relatively higher in Jan-Mar period but tapers off in the following two quarters. However, the trend changes during the election years. In this case, growth in net sales is lower in Jan-Mar quarter and picks up during the election period (Apr-Jun) and remains elevated in the next quarter.

In the automobiles & ancillary sector, net sales of automobiles grow at a higher rate post-election (Jul-Sep quarter) compared to similar period during the non-election years. These trends have been observed during the three preceding general elections.

Investment inflows into the economy remain sluggish during the election period. FPI as % of GDP is low during election period (Apr-Jun) rising after elections (Jul-Sep). Such a trend is not observed during the non-election years. This highlights the need for policy certainty. Although, the uncertainty in its entirety cannot be solely attributed to elections, they play an essential role. The table below summarizes the movement of some of the important macroeconomic variables.

Movement of Macro-Economic variables observed in election period

Note: Coloured area indicates No trend observed; Overall we have defined the Time Period as: Oct-Mar: Pre-election, Apr-May: Election period, Jun-Sep: Post elections, time period for some parameters may vary as per degree of impact; Quarters mentioned as per calendar year;

Sources: CGA, CMIE, D&B India, MOSPI, NSDL & RBI

It has been observed that during election years government expenditure, especially the non-plan expenditure, remains high compared to non-election years. The currency with the public registers a higher growth rate, agricultural wages grow at higher rate in the run up to the election period, inflation generally inches up during election period and eases in the following months. Business sentiment remains subdued prior to the election period. The muted optimism is also reflected in the growth of industrial output. Business optimism as well as industrial production picks up post-election period. Net sales in automobiles and domestic appliances generally rises during the post-election period. Similar trend is also witnessed in the FII inflows. It thus remains to be seen how the current general election impacts the economic parameters at play.

Views are personal. The author is lead economist, Dun and Bradstreet.