Political capital is no longer as compromised around the election cycles as perceived, thereby reducing economic dead-weight loss, according to a study of the political economy over the last 2.5 decades by Emkay Global Financial Services Ltd (EGFSL)..

“It is generally argued that ahead of election cycles, policymakers’ political capital to address the economic efficiencies tends to be compromised. This is not surprising, as voters and interest groups have a powerful impact on virtually every possible economic policy.

“While this has largely held true in India’s case as well, we establish in our study that the changing political landscape has implied that the tendency of policymakers to be pro-cyclical around election cycles has become more efficient. This has helped in reducing the economic deadweight loss with relatively better allocation of resources,” said Madhavi Arora, Lead Economist, EGFSL. 

EGFSL’s analysis of the last five election cycles since FY04 shows that regardless of political affiliation, and barring the GFC (global financial crisis) year, the Centre has generally been committed to fiscal consolidation in the year just preceding an election—mostly also true at an aggregate (Centre+State/ C+S) level.

However, the economic cycles, the macro compulsions and the system polity mix were different in each cycle. Secondly, a deeper look reveals differences in the quality of expenditure, depending on the party in power.

NDA: Prioritized capex over revex

Arora observed that election cycles where the BJP-led NDA (National Democratic Alliance) has been the incumbent have seen capex (capital expenditure) prioritized over revex (revenue expenditure), with current cycle trends being even stronger versus previous cycles.

“While the Vajpayee regime had higher capex compulsions, as the private sector was warming up to lead the capex cycle 2005 onwards, the Modi era has been doing the same for bringing back the missing private sector.

“The UPA (United Progressive Alliance led by Congress) era, on the contrary, enjoyed dividends of the past policies + the first leg of the private capex rally, but on net, ended up deprioritizing capex over revex – more during election years than non-election years,” Arora said.

This trend has been extrapolated across UPA-led states pre-elections, while NDA-led states have, on an average, an improving mix of capex/revex, especially during election years (average of 19.4 per cent versus 18 per cent pre-elections, she added.

The report said the effect of a strong political mandate on economic policy is apparent even when the incumbent has retained power, but with stronger majority.

The present NDA regime’s school of thought has been supply-side driven which has only strengthened in their second (current) term, as power consolidation at central and state levels favored them further ahead of the 2024 elections, opined Arora.

The report emphasised that improving political and policy certainty has meant that the supply-side infra-led push will continue, funded by a reforms-led, structurally-higher revenue buoyancy.

This asset creation will prepare the economy well for non-inflationary growth when there is a more structural pick-up in demand, Arora said.