Amid Election Year, NDA Governments Maintain Focus on Capital Expenditure, Unlike UPA: Insights from Emkay Global

In the midst of an election year, the BJP-led National Democratic Alliance (NDA) government has demonstrated a distinct focus on capital expenditure (capex) and asset creation over revenue expenditure (revex), according to a research report by Madhavi Arora, Lead Economist at Emkay Global Financial Services Ltd.

Analyzing the trends of the five election cycles since 2004, the report highlights that election cycles with the NDA as the incumbent have consistently seen a prioritization of capex over revex. The current election cycle shows an even stronger inclination towards capex compared to previous cycles.

During the tenure of late Prime Minister Atal Bihari Vajpayee, the NDA government faced higher capex compulsions as the private sector geared up to lead the capex cycle from 2005 onwards. In the current era under Prime Minister Narendra Modi, a similar strategy is employed to revive the private sector.

In contrast, the UPA government led by Manmohan Singh, despite enjoying dividends from past policies and the initial phase of private capex rally, tended to deprioritize capex over revex during election years.

This trend extends to UPA-led states pre-elections, while NDA-led states exhibit an improving mix of capex/revex, especially during election years, as per the report.

The report emphasizes the impact of a strong political mandate on economic policy, even when the incumbent retains power with a stronger majority. The NDA regime, particularly in its second term, has adhered to a supply-side-driven approach, consolidating power at central and state levels in anticipation of the 2024 elections.

NDA-II, under Modi's leadership, has notably frontloaded capex in the election year, with 59% of the Budget Estimates allocated, surpassing the UPA's 10-year average of 48%. The mix of capex/revex has improved significantly in NDA-II compared to NDA-I, while UPA-II saw a worsening mix amid declining political popularity.

The study indicates that in general, central governments tend to consolidate in the year preceding an election, regardless of political affiliation. The NDA government, prioritizing capex over revex in the current cycle (FY24), showcases healthy fiscal consolidation, especially when the party is poised to return to power.

The report notes that NDA governments, on average, have maintained higher capex/GDP compared to UPA governments, whether in an election year or not. While revex/GDP tends to be lower in election years, UPA governments have spent more on revex during election years, with the quality of expenditure, i.e., the mix of capex/revex, being healthier in all three NDA regimes compared to UPA-I and II.

(With Agency Inputs)