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Economy Feb 5, 2013

Coming up: a Rs 1.4 lakh cr unexpected election stimulus

By Rajesh Pandathil

Whether they intend it or not, the Indian economy is going to receive a booster dose over the next few months. And it's not about P Chidambaram's forthcoming budget.

According to an Axis Bank report cited by DNA Money, the collateral gain from the 13 state assembly elections slated this year is going to be a Rs 1.4 lakh crore stimulus for the economy.

The report says as many as 2,100 assembly seats will be hotly contested across 13 states.

The report, citing studies by the Centre for Media Studies and the Association for Democratic Reforms, says that average spending per serious candidate on a Lok Sabha seat is Rs 5-8 crore, while the expenditure permitted is just Rs 40 lakh.

Reuters

The average spending per candidate for an state assembly seat is Rs 2-5 crore, as against the permitted spend of Rs 16 lakh.Reuters

Compared with this, the average spending per candidate for an state assembly seat is Rs 2-5 crore, as against the permitted spend of Rs 16 lakh.

Of the total expenditure, 40-60 percent purportedly goes towards posters, banners, television and rally expenses and 25 percent towards transport expenses.

According to the report, the industrial sectors that are likely to reap gains from this are automobiles, financial services and FMCG.

As per the report, passenger cars show strong volume growth in election years. Axis Bank expects Maruti, M&M and Hero to gain market share during the period.

In financial services, increased money circulation will help banks, micro-finance firms and micro-housing. Gold loans, auto loans and money transfer are likely to gain momentum due to the elections.

Banks are likely to witness an increase in low-cost deposits. Their rural lending is also likely to increase, enabling them to easily meet the priority sector lending targets.

Higher disposable income is likely to boost spending for fast moving consumer goods, like hair oils, shampoos, beverages packaged foods and other such products.

The elections are likely to help these companies offset the impact of the decline in discretionary spending they are witnessing at present.

A huge stimulus indeed with power to oil the wheels of the economy that are slowing.

But what will the government gain from this?

Very little, for the simple reason that most of the poll spending is usually done in black. According to the report, declarations show that the majority of the contributions will be below Rs 20,000 and done in cash, as these are exempt from declaring the source.

Moreover, especially in a pre-election year, the government's fiscal deficit overshoots the target by 100 basis points and inflation in the economy gains 150 basis points from the previous years, according to the report.

But then, politicians are not likely to bother about the real cost of their extravaganza. The fallout - inflation and deficits - will have to be handled by the successor government.

by Rajesh Pandathil

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