IMPACT OF ELECTION ON INDIAN ECONOMIC MARKET

by Reshma Majumder
Indian Institute of Management Rohtak, Rohtak 124010, Haryana, India

ABSTRACT
In this article, a study on the effect of Lok Sabha election on various economic features like exchange rate, inflation, fiscal deficit and stocks has been carried out. A
thorough probe into the data from 1970 to 2014 revealed that there is no defining pattern (be it in terms of empirical correlations or qualitative-wise) governing
the macroeconomic variables before and after the election. In fact, it is more of various ups & downs in the economic growth prior to 2000 and major political
changes in the country over the years are found to influence the country’s economy. In almost every year it is the state elections, along with the other factors (like
global recession, LPG, emergency, war) could have been the reasons that we don’t find political business cycles or political budget cycles in India in major parts of
the early decades within the time current framework. Till the recent times, when Indian economy has started showing steady economic growth, it will be
possible to have Political Budget Cycles (PBC) similar to what is already present in most of the developed countries.

• Chauvet and Collier (2008) mentioned about the cyclical effects of election on economy, since any election comes after a fixed time cycle. This is more so
evident in developing countries instead of the developed ones.
• The ruling political party almost always tries to introduce economic benefits and reforms that is particularly an incentive for the voters in the pre-election
period to attract more votes. Investments and reforms mostly in this period can be referred to as short term benefits for a long term cause.
• Snowberg et al. (2007) found that G.W. Bush’s re-election led to an increase in oil price due higher demand for economic expansion which later on affected
globally.
• Market changes mostly because of expectations of market traders rather than actual partisan effect.
• Kaplan (2006) found political business cycles revealing that competitive elections within democracies lead to unfavorable economic outcomes, such as a post-
election recession or inflation. According to this theory, incumbent politicians stimulate the economy prior to elections to secure re-election, causing a post-
election economic slowdown.
• Schuknecht (1996) found significant empirical evidence for political budget cycles in his study of 35 developing countries from 1970 to 1992. According to his
results, the average fiscal deficit fluctuated by as much as 0.66 percent of GDP around elections.
• The economy would expand (i.e. higher real GDP and lower unemployment) before elections, and significantly slow (as characterized by lower real GDP, higher
unemployment, and higher inflation) after elections.
• Literature suggests elections might not be the only reason of macroeconomic changes rather, long term outcomes could be more due to poor governance issues
intertwined with minute policy changes during the election period.
• Khemami (2010) noted that “targeted employment” and “welfare transfers” can attract more voters, while delivery of infrastructure as public good can be
uncertain in elections.
• Khemami (2004) discussed on the effect of elections on public services like road construction by state PWD’s. Road construction projects which are languished
for a while are executed very fast under political pressure or because central government provides funds to its affiliated states.
• Sen and Vaidya (1996), in terms of Indian prospects, found that electoral cycle only affects the price of manufactured products and the prices of primary
products (like agricultural crops) remain the same.
• DK Srivastava (2008) examines the degree to which political cycles play a role in deciding the fiscal deficits. This article points out that the government spending
on construction of roads is higher in the election years in India.

Handbook of statistics on Indian Economy (Sources: RBI Official Site)

Decade-wise %
variation in economic
parameters

• Pink band indicates

economic turmoil
• Grey band indicates
election year

INFERENCES

Percentage change in economic factors during election years

CONCLUSION
• There is no proof of PBC in India. This might happen due to variation in the election timings in state and general elections.
• People also believe that Central government plays a larger role in the state’s development. So because of this central government has to intervene in
the state elections that happen in almost every year in some or other state in India which is unlike other countries of the world.
• We can say that design of the federal structure in India is such that we don’t find existence of PBC unlike most of the western developed countries.
• Our Country will benefit from the Partisan Theory if the system elects between two political parties only.
• One Country One Election (even if it is state or central election happens together) at the same time in a constant time-cycle, can set off the PBC in
India.