Wooing the electorate

BEATING THE STREET

Election economics is an interesting topic. After all, elections are recurring cyclical events. And, anywhere in a democracy, politicians will use whatever economic levers they possess to tweak the hearts and minds of voters.

So, elections are usually preceded by giveaways. Some combination of tax-breaks, social subsidy, job-protection, higher social security benefits or whatever, is on offer before an election. This is combined with promises of more goodies to come.

This is as likely to be true for a developed nation as an undeveloped one. The efforts can be as blatant anywhere "" witness the current US president's efforts to package a combination of massive deficits with tax-breaks for the wealthy and a determined effort to conceal the real costs of the Iraq war.

It is very rare for a politician to promise tough measures in an election scenario. Mrs Thatcher did win her first mandate by promising to be tough and a couple of Israeli and one Argentine election at least, have been won by candidates who promised more tight-fisted governance.

But those were special circumstances. Thatcher was wooing an electorate that was sick of living with a stagnant economy, very poor public services, rampant trade-unionism and visibly useless government expenditure. The Israelis and Argentines were dealing with triple-digit inflation.

In more normal circumstances, politicians can be relied on to ease the purse strings just before elections. This is supposed to enhance the feelgood factor and, it is hoped, get them voted back into power. Sometime later, the chickens generally come home to roost.

A rush of pre-election liquidity and deficit financing means a lagged spike in the inflation rate and a compulsion to raise both taxes and rates post-elections. Those compulsions operate even if the "wrong" party comes to power. This is why an administration generally does unpleasant and unpopular things in the first year of a new term. This could happen quite soon after this election concludes.

Global oil prices are heading towards new highs "" an inevitable inflationary factor. There will have to be retail oil price hikes almost immediately "" these have been deliberately delayed.

Right now, the spread between inflation and PLR is as thin as it's ever been. A 200 basis point rise in the rate of inflation would force a situation when interest rates move up "" something nobody has considered a serious possibility in the last two years.

If rates rise, economic growth faces a hurdle and the stock markets might tank. If the sheen goes off stock market performance, FIIs will become net sellers. If portfolio investments start flowing out, forex reserves might dwindle with startling speed. If the next monsoon is sub-par, every optimistic projection goes haywire.

Why am I painting this gloom and doom scenario? Not because I expect every detail in it will come true or even that events over the next year will resemble the picture above.

But far too many people are saying that nothing can go wrong with "India Shining" short of another 9-11 or a war. Sorry, the economy could tank under entirely normal circumstances and, if it does, it behoves all of us to be prepared.