how do election affect the Indian economy? ( in 120-150 words)
Answers
Answer:Abstract
This report explains the impact of Lok Sabha election on different economic factors like inflation,
exchange rate, stocks and deficit. Working with this data from 1970 to 2014, we have found out
that there is no particular pattern in these economic variables before and after the election. Before
2000, India was going through various ups and downs in the economic growth in addition to major
political changes happening in the country. In almost every year there is a state election that is
happening in India which along with the other factors could have been the reasons that we don’t
find political business cycles or political budget cycles in India. As the Indian economy shows
steady growth in future, it is possible to have political budget cycles as it is present in most of the
developed countries.
1. Introduction
Political budget cycles theories indicate that macroeconomic variables like output,
unemployment, inflation show a particular pattern during the election year1
. In India also, we can
see political parties change their stances a lot to lure the voters for their benefits. In the Sensex
data plot from 1979, we can see that a year before an elections, Sensex surges almost all the
election periods except for 1998 elections. This trend could be attributed to the fact that investors
were afraid of the possibility of coalition government causing the policy paralysis. There is also
an observable pattern in the Sensex performance for the post-election years. Except for 1999,
Sensex always surged up after the elections happened. That exception might be there because
earlier Atal Bihari Vajpayee led coalition government failed to get confidence vote because of
allied parties removed the support in between. Investors were still not sure that government will
last for 5 years.
For the Exchange rate for USD, there is no particular pattern found before or after the
elections. Exchange rate has been changing continuously over the years as India’s imports are
increasing very fast as compared to exports which have been increasing slowly. Government
policies rarely have affected the exchange rate changes.
In India, CPI data from 1958 does not give any particular pattern in terms of increase or
decrease before and after the elections, but mostly inflation decreases pre-election year. There have
been many theories which suggest that inflation increase before the elections. Government
increases its spending pre-election year, which specially affects inflation in the manufacturing
products. But government controls the inflation in primary articles which affects the common man
directly to indicate that they are efficient. In India, Government generally spends money on the
schemes that directly benefit to the people. Because of illiteracy, government doesn’t spend money
on capital investment. But since people are becoming more and more aware government has to
think long term before the elections.
There is a pattern in the pre-election and post-election year deficits in most of the years.
Fiscal deficit goes up pre-election and a drop in the fiscal policy is observed post-election year.