Study on poll funds says cement sales linked to elections

The authors attempt to empirically describe and quantify the under-the-table compact between politicians and builders. The quid pro quo goes like this: Politicians park their illicit assets with builders because “they require a place to invest these assets where they can avoid public scrutiny while earning a decent return”. Builders rely on politicians for discretionary policy favours.

Come elections,however,builders must re-route funds back to politicians as indirect election finance,as a result drying up liquidity in the real estate sector.

Using state-wise data on the monthly consumption of cement and the timing of elections in India’s 17 major states over a period of 15 years,the authors assessed whether fluctuations in construction activities are linked to electoral cycles in India.

The 17 states in the study account for over 92 per cent of the country’s population; the 15 years between 1995 and 2010 encompass a total of 52 state elections and five parliamentary elections.

The reason they picked cement,say Kapur and Vaishnav,is because “what money is to elections,cement is to construction” and because “industry research estimates that real estate accounts for between 65 and 75 per cent of India’s domestic cement demand”.

The study finds a statistically significant drop in cement consumption of about 12 to 15 per cent during the four-week campaign period prior to election day in the Assembly polls.

Interestingly,the paper’s core hypothesis of a contraction in business activity around elections is at odds with much of the existing literature on opportunistic business cycles in developing democracies that assumes an expansion of economic activity during elections.

Within the overall pattern,there are variations. The study finds that the election-related decline in cement consumption is stronger for urban as opposed to rural states — 16 per cent versus 10 per cent. Using population figures from the 1991 and 2001 census,it identifies Andhra Pradesh,Delhi,Gujarat,Haryana,Karnataka,Maharashtra,Punjab,Tamil Nadu and West Bengal as urban states.

Given that the state government is the primary regulator of the land and building activity sectors,the contraction in cement consumption is of a “smaller magnitude” in national elections as opposed to state elections. National elections are associated with a decline of up to 8 per cent in the level of cement consumption,says the study.

There is a much larger decline,of about 38 per cent,when state and national elections are held concurrently. Here,the case of Andhra Pradesh is illustrative — it is the only state where the last three state Assembly elections have coincided with parliamentary elections in 1999,2004 and 2009.

The decline is larger for scheduled as opposed to unscheduled elections,says the study. Uncertainty injected in the system in the latter,it says,might catch builders and politicians off guard and thus disrupt the schedule of transfers; scheduled elections provide the certainty that allows them to coordinate their activities.

The real estate sector is a particularly suitable conduit for black money,the study points out,because of several attributes. Accounting for over 7 per cent of India’s GDP,this booming industry has the capacity to absorb large amounts of cash. Yet,banks are wary of lending to this sector because many transactions are of dubious legality. Most of all,“the sector’s regulatory intensity not only makes it a boon for raising funds but also provides politicians with a mechanism to enforce its ‘contract’ with builders”.