<b>Jamal Mecklai:</b> Burning money

I remember back when I was in school, my closest friend was from what-appeared-to-be a seriously wealthy family. While they lived very well, his father was a prudent and frugal man. One Diwali, all of us were clamouring for more money for fireworks from our parents. His father, despite, as I said, being seriously wealthy, was the most resistant, but my friend was horrifyingly dogged in his demand. Exasperated one evening, his dad took out a Rs 100 note and burned it in front of the family, saying, "There you go, there's your fireworks."

When we heard about it, we were shocked out of our wits and thought he was nuts - in those days, Rs 100 bought an awful lot of fireworks!

Decades later, older and wiser myself, I know him much better. Far from nuts, he is a wonderful, simple, and genuinely generous man. His objection, which he still holds, is that burning fireworks is wasteful and, in a poor country like India, sinful.

However, while I admire and love him, I continue to disagree with him about fireworks. Even though I acknowledge that they are terrible environmentally and burning them is, indeed, tantamount to burning money, I know that fireworks deliver joy, a commodity that has no price.

Which brings me to the current spree of burning money - reportedly Rs 30,000 crore will be spent on the Lok Sabha election. Unfortunately, it is unlikely to deliver any joy, except, possibly, to the winners and, I assume, their invisible bankrollers. (Incidentally, this expected expenditure is three times the amount spent in 2009 and, while only slightly lower in absolute terms than the most expensive election ever - the 2012 US presidential election, at $7 billion - it is by far the most expensive when viewed as a percentage of gross domestic product, or GDP.)

For most Indians, this grotesque expenditure, amounting to nearly 0.25 per cent of our GDP, far from any joy, will deliver only (1) a modest, temporary boost to GDP, since most of the expenditure is black money that was not in the formal system; and (2) additional inflation pressure, since all of this money is, in fact, being burnt on consumption - booze, gifts, advertising and, of course, plain and simple cash.

This will doubtless increase Reserve Bank of India (RBI) Governor Raghuram Rajan's caution on interest rates. In any case, it is clear that he doesn't want to make any structural changes in his policy approach till the immediate nodal points are out of the way. Thus, it is near certain that there will be no change in rates till mid-May, when the election results are announced - and, at that time, if the currently low-grade concerns about the monsoon get accentuated, things may remain on hold for a further month or two.

Interestingly - and rather surprisingly - markets, which are always looking for easier money, don't seem to be looking for rate cuts any time soon. This unusual situation may be because sentiment is hopped up right now with the supposed Narendra Modi wave, and/or because there may not be a whole lot of investment plans in the hopper right now. Of course, this could change quickly if the opinion polls are correct and Mr Modi is crowned in Delhi. Already BJP officials are muttering in that direction and the spotlight, even before the votes are counted, is already shifting to Mint Street. But Dr Rajan will, I think, prove to be an immovable object, even more so with global markets getting increasingly volatile. My number-one market guru has been advising caution on the Dow, fearing a decisive break of 16,000.

On the other hand, if the polls turn out to be wrong, and Mr Modi is unable to garner a working majority, there will obviously be some serious fallout in our equity market. The rupee, too, will wobble and the RBI will have to hold on ever tighter. Recent price action - the rupee has faltered twice in trying to pierce the long-term resistance just above 60 - suggests it may, in any case, be due a technical correction, which could take it all the way down below 62.

Either way, it may turn out that the RBI's reserve gathering was very timely.

There is also a reasonable likelihood that, either way, we could be looking at another election within a couple of years. Get ready to burn another 0.25 per cent of GDP or more.

Unless, of course, the Aam Aadmi Party (AAP) effect spreads rapidly, as it should. In the current election, the AAP is likely to spend no more than Rs 50 crore, and most observers believe it will be able to win around five per cent of the national vote. At that rate, the entire next election should not cost much more than Rs 1,000 crore, a far, far cry from today's foolish - indeed, sinful - burning of money.

jamal@mecklai.com