Polls don't lead to fiscal profligacy

Mumbai: While there is a popular belief that the incumbent government would loosen its purse strings and spend more than budgeted heading to an election year, an analysis of the government action during the previous election years show that this is not a thumb rule.

“Our analysis of the centre’s fiscal spending (revenue spending less interest payments, which is what matters for elections) suggests that while the centre spent more than budgeted in FY99 and FY09, it spent less than budgeted in the other two election years – FY04 and FY14,” said Nikhil Gupta and Rahul Agrawal, research analysts at Motilal Oswal Securities.

They added that the aggregate spending by six states – Andhra Pradesh, Haryana, Maharashtra, Madhya Pradesh, Odisha and Rajasthan was lower than budgeted in each of the past four election years. In fact, fiscal spending in Maharashtra, the largest Indian state, accounting for 15 per cent of national GDP – was lower than budgeted in all four-election years.

“This confirms that the popular belief of fiscal profligacy in election years is unfounded. Historical analysis, thus, confirms that there is no certain upside bias to the spending targets or budget estimates during election years by the centre or individual states. This is in stark contrast to the popular belief,” they said.

Whether there are any correlation between fiscal spending and election results, the study showed that the incumbent retained power in FY99 and FY09 when spending growth was higher than budgeted, but lost elections in FY04 and FY14 when spending was lower than budgeted.

However, this trend cannot be generalised, as there was no visible connection between fiscal spending and election results at individual state level.  

“For instance, while spending was lower than budgeted in all four election years in Maharashtra, the incumbents lost in FY99 and FY14, but won in FY04 and FY09. Similarly, the government has changed in every election in Rajasthan, irrespective of the spending patterns,” they added.