Economy Always Loses When Political Parties Cross Swords

The cost of elections is generally seen only in terms of the cost to the government and the impact on the fiscal deficit. But the projected cost to the government of about Rs 700 crore is not even a close estimation of what it will cost the economy as a whole.

Every general election since 1952 has caused turbulence in major indicators like output, prices, revenues and government expenditure, deficits, money supply, credit offtake and equity prices. This obviously happens because in an election phase, the government becomes more interventionist, in one way or another.

Data for the last 45 years shows that in an election year, the rate of growth of output plummets. It takes at least two years for the economy to get over the resultant disturbance. The reason: Private investment decisions invariably get postponed. Also, government investment declines as more is spent on current expenditure.

This results in the rate of growth of output declining. When seen in relation to the behaviour of other variables, the drop in output forms only one part of what is known as a political-business cycle induced by polls.

The simplest modern version of such a cycle argues that an incumbent government will use expansionary policies to pump up the economy prior to an election. Then, once secure in office, it will act to cool down the overheated economy that it has theoretically created. In the Indian context, it is the uncertainty that accompanies elections which seems more important. There is a view that with the increasing role of the market in determining the format of resource mobilisation, allocation and distribution, following the reforms, the influence of political variables will be reduced.

However, while the nature of the political business cycles, or its proximate reasons, may change, the effect of political variables will if anything be strengthened. This is because increased market orientation induces a stronger materialistic slant in politics. Now, more than ever before, economics has a bigger role than politics in determining who gets what in terms of material resources.

The reforms have also created an open economy; marked not only by the growing role of international trade but also by a more open current- and capital-account situation in the balance of payments. Thus, the political cycle will have a much stronger impact on the economy than before.