How Elections Impact The Economy?

The dates for the general elections in India have just been announced in India. Prime Minister Narendra Modi has also expressed his enthusiasm about the upcoming “festival” of democracy. However, India is also the largest democracy in the world with around 900 million voters. This means that this festival of democracy is very expensive to conduct. Apart from the direct expenses involved in conducting such a huge event, there are also many indirect costs. Historical data shows that the economy of any country usually slows down before an election year.

In this article, we will understand the possible reasons behind this slowdown.

Government Debt

The first and most obvious impact of an election is a significant increase in national debt being taken by the government. Elections in India and across the world are marked by the introduction of policies which are economic disasters but have political benefits. The rollout of welfare schemes which will become unsustainable in the long run is a common ploy which is used by parties which are in power in order to woo the voters. Such manipulation would not work if the voters were rational and were likely to elect a government on the basis of its long term performance. However, unfortunately, that is not the case. Voters often focus on the short term benefits that they are likely to receive which causes governments to spend a lot of money trying to look good just before the elections.

Reduced Taxes

Taxes are an extremely touch subject amongst all voters across the world. The introduction of or increase in taxes is enough to make a government unpopular. Conversely, repealing or reducing taxes is enough to increase the popularity of any government. This is the reason why pre-election budgets are often marked by tax breaks for the masses. Often, the industrialists and the wealthy are made to pay for these tax breaks. A lot of times, the government is just adding to the national debt which means that the taxes are only reduced temporarily and will have to be increased at a later date.

Decisions Postponed

Industrialists and businessmen are known to avoid taking key decisions during an election year. This is because a change in the government may also mean a change in the priorities of the government. Many times the policies of a government entirely change the viability of a project. Businessmen want to avoid the risk of their projects becoming redundant thanks to government policies. Hence, they prefer to play the wait and watch game. This obviously has a negative impact on the economy since the economic output, and the jobs which could have been created now are being postponed.

Slower Credit Growth

Since industrialists and businessmen are undertaking fewer projects, banks do not have to lend out too much money. This slows down the rate of credit growth which affects the economy in a negative manner. In fact, in countries like India, an election is the time when businessmen pull their money out of bank accounts and use it finance the election campaign of their preferred political parties. Since the money is pulled out, the amount of bank deposits reduces. Once again, since credit growth is limited by the amount of deposits on hand, it is drastically reduced during the election year.

Increased Inflation

The election period is marked by increased spending by each of the political parties. Every political party spends millions of dollars. A lot of this money is suddenly taken out from bank accounts and unleashed into the market. This is the reason why suddenly there is a lot of money chasing limited amounts of goods. This results in price inflation. Products like food items and drinks also tend to face shortage which leads to an increase in their price.

Slower Economic Growth

From all the above points it is clear that during an election year, neither the government nor the citizens are looking at long term results. They are only concerned about the immediate impact that their policies can create. As a result, the economy completely stops focusing on long term imports. Instead, the focus is on immediate consumption. Thus long term spending like infrastructure projects takes a hit. This has led to slower economic growth in every election year that the Indian economy has seen after independence.

Not all industries face the negative impact of an election. For some industries, the impact is very positive. For instance, companies which provide rental equipment for organizing events see a brisk increase in business because of political rallies. Similarly, manufacturers of certain types of goods which are used by political parties as freebies also see a sudden spurt in their business. Large scale temporary employment is provided since a lot of event management and security personnel are needed in order to conduct political rallies.

The bottom line is that elections are a drain on the national economy. Of course, they are very important, and they define what a democracy is. However, every election costs the economy a lot of money. Hence, a country would be better, from an economic standpoint, by avoiding frequent elections. It is therefore in the voters’ interest to elect a strong government that will last the entire tenure so that elections do not have to be undertaken before they are planned.