How much growth in a political candidate’s assets is too much?

With the process for filing of nominations for the forthcoming Lok Sabha election having been initiated, one of the matters of interest for the media is the candidates’ declaration of assets and liabilities. Most media reports of candidates filing nominations are accompanied by a summary of their assets and liabilities and criminal records (the disclosure of these became mandatory from the 2004 election onward). If the candidate had also contested in the 2009 election, a standard reporting practice is to compare his/her current declared assets and liabilities to the numbers mentioned in 2009, and look at the increase.

In this edition of Election Metrics, we will see what a reasonable increase in the assets of a politician is, and what is the ratio (of current net worth to net worth in 2009) beyond which it makes sense to be outraged.

There are two ways in which a person’s assets can grow—income and asset valuation. Income refers to the money that the person has made in the given time period by way of supplying goods and services. Asset growth refers to the increase in net worth as a consequence of increase in the value of assets held. For example, if I own an item that was worth ₹ 1 five years ago, and it is worth ₹ 5 now, it represents an increase in net worth of ₹ 4.

Now, let us estimate to what extent the increase in a candidate’s assets between March 2009 and now is realistic. We can assume that the balance increase in assets is due to the person’s income in this time period, and based on how “reasonable” this income for the five-year period is, we can make a decision on whether to be outraged.

First of all, let us divide assets into four broad asset classes, which are representative of ways in which most Indians save—stocks, gold, real estate and agricultural land. Other assets owned by candidates such as automobiles are generally depreciating assets (that is, assets whose values decline as time goes by) and we can safely assume that any increase in the value of these assets is due to the income effect.

On 20 March 2009, the Nifty closed at 2,807 points. On 20 March 2014, the index was at 6,483 points, representing an increase of 130% over the value from five years ago. This, however, doesn’t represent all the returns from holding the market portfolio. If you hold stocks, you make money not only through appreciation but also through dividends. For this, we consider the Nifty Total Returns Index, published by the National Stock Exchange, which includes the value of dividends in the value of the Nifty. This index has risen by a factor of 2.44, or by 144% between 20 March 2009 and 20 March 2014. Thus, accounting for both income and asset increase factors, someone who held a “market portfolio” in 2009 is expected to have increased his assets by about 144% by 2014.

Data from the Reserve Bank of India (RBI) show that gold traded at ₹ 1,289 per gram in 2008-09. Gold currently trades at ₹ 2,948 per gram, representing an increase in asset price by 129%. Unlike stocks, note that gold by itself doesn’t give dividends. Hence, we can say that a candidate who held all his assets in the form of gold in 2009 can see an increase in asset value by 129%.

Valuing increase in real estate value is harder. Unlike stocks, where people’s personal stock portfolios are unlikely to be very different or uncorrelated from the broad market portfolio, people’s real estate holdings are usually not particularly diversified and are thus highly unlikely to be correlated to the broad market price movements. Nevertheless, we can do worse than to use an overall index of real estate prices in India. The National Housing Bank (NHB, wholly owned by RBI) publishes a Residex for different cities. This index has been published since 2007. Taking from this index, financial market data provider and financial blogger Deepak Shenoy of Capital Mind has created an aggregated “Capital Mind All India Index” of real estate prices. This index is essentially a weighted average of the real estate price indices (as per NHB’s Residex) from various Indian cities. In 2009, this index was around 110. Currently it is around 180, representing an increase of 63%. Thus, a candidate holding all his assets in the form of the “market portfolio” of urban real estate would see his assets increase in value by about 63%. It would be useful to mention here again that hardly anyone holds anything close to the “market portfolio” when it comes to real estate holdings.

The last category, agricultural land, is the trickiest. The market is highly illiquid (thanks to restrictions on purchase and sale), and highly prone to political intervention (acquisition for industrial and infrastructure projects, change of land use notifications etc.). It is nigh impossible to get credible “index-like” data for prices of agricultural land. The Economic Times, however, conducted a study last year to study the increase in prices of agricultural land in various states. This survey finds that while in some cases the value of agricultural land grew by a factor of 3 between 2000 and 2013, in other cases, the increase was by a factor of 100. The survey estimates that the compounded annual growth rate (CAGR) of prices of agricultural land can vary between 9.6% and 55%. Extrapolating from this, we can estimate that the value of agricultural land could have increased by anywhere between 60% and 800% over the five years.

Based on the above data, and keeping in mind that real estate returns have a good chance of being much higher (or lower) than the average of 63%, we can assume that a candidate’s net worth can be expected to have tripled over the past five years on account of asset price growth alone. This is for candidates who don’t own agricultural land (disclosures include a break-up of how a candidate’s assets are distributed across asset classes). For those who own agricultural land, however, a much larger increase in value of assets can be attributed to increase in the value of existing assets itself.

Thus, using the given table, we can analyse how much of a candidate’s increase in net worth can be attributed to intrinsic increase in the value of existing assets. Stripping this out from the overall growth in assets gives us the cumulative income of a candidate and his/her family in the period between the earlier and the current elections. It is better if we apply our value judgments to this number rather than the overall increase in assets.

Finally, is there a “magic number” beyond which it makes sense to be outraged over a candidate’s increase in assets? The answer is both yes and no. The above table gives us an indication of how much growth in assets is reasonable. If we want a precise number, considering that real estate portfolios are undiversified and don’t represent anything close to the market portfolio, we can say based on the numbers that anything up to a 200% increase in a candidate’s net worth is reasonable (for a candidate who does not hold agricultural land).

The “reasonable limit” can be higher (will be hard to put a number to this), however, for candidates who also hold agricultural land, given the illiquidity in their transactions.