ElectioNOMICS

Written by M R Madhavan | Updated: Apr 27 2009, 05:21am hrs
There are no authentic figures for the total likely expenditure on account of the parliamentary elections. The Election Commission is expected to spend about Rs 1,500 crore. Various estimates suggest a total expenditure of the order of Rs 8,000 to Rs 10,000 crore by political parties and candidates.

Can the Indian economy afford this scale of expenditure Is the spending detrimental at a time of economic slowdown These questions may arise again in a couple of years if the election leads to the formation of an unstable government that fails to last the full term. We argue that increased spending is precisely what is needed when the economy is showing signs of sluggish behaviour. And it is even better if much of the spending is done by private parties.

The election commission monitors the spending as well as campaigns (such as posters, vehicles used etc.). However, anecdotal evidence suggests that the actual expenditure incurred by candidates is several times higher than the legal limit. Indeed, the CEC, at a conference, narrated an incident during the assembly elections in 2008, where an ambulance was caught ferrying currency notes to be used for election campaigns.

Such incidents and use of money power may, arguably, have adverse implications for a democracy. Collection of illegal money is usually from illegitimate sources, and the candidates may be beholden to their funders - once elected, they could manipulate policy to aid these donors. That said, such spending is actually beneficial to the economy in several ways.

Election shot

Many governments across the world have focussed on pump priming the economy in the last few months. The objective is to increase spending and consumption so that there is demand for using idle productive capacity, which in turn would create employment. The flip side is that deficit spending by the government increases public debt, with long term implication for inflation and interest rates.

In India, the government spending on elections in 2004 was about Rs 1,300 crore. This year, it is likely to be of the order of Rs 1,500 crore, or 0.03% of GDP. This amount is too small to have any significant impact as either a pump-priming mechanism, or on interest rates and inflation.

The spending by private sources is much higher. On average about 10 candidates contest a Lok Sabha seat. If three of these candidates are backed by political parties, and spend Rs 3 crore each on the election, and the other candidates spend a total of Rs 1 crore, the sum works to about Rs 5,500 crore. Add to this the common spending by political parties (TV advertisements, travel of senior party officials etc), and the overall estimate of Rs 8,000 to Rs 10,000 crore appears plausible.

The official accounts disclose far lower amounts - for example, the Congress declared expenses of Rs 125 crore in 2004, while the NCP and CPI disclosed expenses of a few lakh rupees.

This spending directly leads to an increase in economic activity - or GDP - and creates jobs and purchasing power. Depending on the multiplier effect, the actual impact on GDP could be higher. Assuming a multiplier of three, the contribution would be about 0.5 % of GDP.

This activity comes without any negative implications for government finance. Indeed, one can argue that government spending of 0.03% of GDP leading to an economic expansion of 0.5% of GDP is an excellent outcome during a time of economic slowdown.

The colour of money

A second positive implication is that much of this amount is in the form of unaccounted or black money. Some of this money will get converted into white money, though the extent of this is difficult to estimate.

It is reasonable to believe that a significant proportion of the money will come from the relatively affluent class. Much of the spending, especially the portion that is directly doled out to voters, is on the relatively poorer sections. This transfer of wealth is another positive corollary.

The election campaigns this year have been far more subdued than earlier ones. We have seen this trend over the last few years during assembly elections too. Part of the reason can be attributed to stricter monitoring by the election commission. While the commission works in the interest of democracy, the result may not be the most desirable from a purely economic point of view. Of course, economic growth is not the mandate of the election commission - its job is to ensure that election laws are adhered to.

Having strict limits on election spending by parties and candidates may be required to get the appropriate candidates elected as representatives. It levels the playing field between the affluent sections (and those backed by them) and others. It reduces conflict of interest of the elected representatives while they make laws and policies. However, it has an adverse effect on economic growth. From the point of increasing economic growth, any incremental spending is good.

Furthermore, transfer of wealth from the richer sections to the poorer people serves the objective of equitable distribution of resources. Thus, one may argue that elections in 2009 have come at an opportune time, when the economy needs a boost.

The author works with PRS Legislative Research, Delhi

Spending limit

A candidate may not spend more than Rs 25 lakh for campaigning for Lok Sabha elections. The limit is lower for some small states. This amount includes spending by the party on the candidates election, except for the travel of some senior party leaders. There are restrictions on raising campaign funds too. All money should be from Indian sources. Corporates may donate up to 5% of average profits of previous three years. There is no limit to individual donations. For all donations above Rs 20,000, the name and address of the donor have to be recorded.