Diwali: An economist’s account

Diwali, or Deepavali as it is known in Sanskrit is one of the biggest festivals in India for the Hindus. While the festival celebrates the victory of good over evil, it is also an extravaganza for another reason: The festival causes a tremendous leap in demand for most commodities and the economy in general.

The day, or week rather, brings together shopping, gambling and society at large. The underlying fact about the festival is that it represents a new year for all traders and professionals of the faith. Most importantly, while most festivals increase seasonal demand as a result of the season itself, Deepavali increases demand solely by the fact that people acknowledge the period to be auspicious.

To state why a sense of auspiciousness would affect the economy would be hard if it weren’t for the Bombay Stock Exchange, one of the two largest exchanges in the country. While the entire country celebrates this national holiday, the Bombay Stock Exchange opens trading for just an hour on the day. Most traders are eager to make a profit, however miniscule, as a sign of a prosperous year to come. This trading commonly called ‘Mahurat Trading’ sees huge volumes and extreme volatility.

If you’re a car dealer and Deepavali is approaching you should definitely say a prayer irrespective of your beliefs. This particular period is almost as important as an entire quarter to most retail industries. Families often defer large purchases until this time of year, which is considered highly auspicious. In 2009, it was reported that the incremental consumption expenditure excluding retail sales of consumer goods specifically for Deepavali was over $2 billion!

A number of traditions that are part of the festival directly affect the economy. For one, it is customary in most families to buy some piece of new clothing. When you consider a population like India’s and a new piece of clothing for over 60% of that population, the sudden boom in consumption is quite astounding! The purchase of gold and the consequent surge in its price is another common occurrence during the festive season. The other facet of the festival that causes massive distribution of wealth is gambling; it is considered good luck to win in a gambling game commonly called ‘Theen Pathi’, which is a shorter version of poker.

A culmination of the festival’s traditions results in increased demand, consumption and an economic boost. Indian banks borrowed an average of Rs878.7bn ($19.7bn) a day from the central bank last week to prepare themselves for this period of high demand. It’s quite astonishing that the Reserve Bank of India itself announced temporary liquidity measures to help neutralize what it perceived to be a credit crunch during the festive season.

Deepavali really is a holy and economically robust event. The fireworks that embody the festival light up the sky and line/fill the country’s pockets. It is customary to offer prayers to Goddess Lakshmi during the festival. If you haven’t guessed it already, yes she is the Goddess of Wealth!