ROI: Rely On Inspiration

In corporate finance, ROI (or, return on investment) is a well-known and quantifiable ratio. It has no ambiguities and has very little room for negotiation. But, the concept of ROI is now being extended to other areas as well which have ample space for manoeuvre and, sometimes, can even evoke the involvement of the super-natural. The on-going general elections have invested the temporal ROI concept with an otherworldly veneer.

In accounting terms, ROI is used to measure how effectively a corporation is using capital to generate profits. In simple terms, it is measured by dividing a company’s operating profits (adjusted for taxes) by its outstanding equity capital plus long-term debt. But, then, there are other versions of ROI as well. For example, in the stock market, return on investment measures the net gain made from investments compared to the cost of investments. And, then there is an ROI definition tailor-made to fit the IT department too, which presumably computes the efficacy of investment in all kinds of boxes versus the improvement in productivity or gains in efficiency, or whatever.

But all these measures are quite solid and leave little room for uncertainty. But, once the finance guy’s ROI concept travels to the advertising industry, it acquires a wee bit of grey zone. In traditional advertising, the ROI concept tried to measure the efficacy of advertising by pitting the bucks spent on advertising versus the money it generated by an increase in sales.

Now, this is not so easy to determine. Sales can increase for a variety of reasons, including the influence of advertising. There is no scientific method to prove that ‘x’ dollars spent on advertising and marketing leads to sales increasing by ‘y’ dollars. Then came the internet and the guys hit pay dirt. It then became easy to determine which banner ads got how many clicks, and how many of them then were converted into online sales. But, there still existed some room for doubt – there is no way of knowing how many people saw a banner ad on an internet site and then went purchased the product advertised from the shop on the street-corner.

To be fair, the guys with the calculators and the fancy spreadsheets seem to have made some progress and today there exist some proximate formulae for figuring out the ROI of an advertising campaign. While the ROI concept is basically a qualitative one in finance and accounting, in advertising and marketing it acquires a qualitative hue.

But, the general elections in India have imparted a completely speculative ring to the ROI term. The Times of India edition dated April 14 had an interesting, Hyderabad-datelined story on the front page: “In an agenda-less election, with political parties forced to bank only on the promise of more goodies, the crackdown on the flow of liquor and cash being transferred in vehicles is proving to be a big dampener for aspirants. Every car moving around in the city, and especially its outskirts, is being stopped at various points by cops led by the Election Commission-appointed DGP A K Mohanty, its licence plate noted and the boot and space under the seats thoroughly checked. Such checks have yielded a booty of Rs 23 crore in the last week, leaving many of the candidates apprehensive.”

It is well-known that currency in circulation shows a sharp jump in the weeks preceding an election. It has been noticed this year too. Writing in The Economic Times, dated March 6, Gayatri Nayak and Gaurav Pai observe: “As the world’s largest democratic exercise unfolds, parties and candidates are expected to mobilise and spend thousands of crores as part of their campaign. An immediate impact of all the spending by political parties is an increased volume of cash in the form of currency. This year too, like every other year, there has been a sharp jump in currency in circulation. Some traders in the foreign exchange market feel that with political parties reaching out for overseas funds, there will be a rise in remittances before the elections , as in most years when the country goes to the polls.”

The moot point here then is: how do candidates know whether the cash spent (or liquor bottles -- the proxy for currency in many areas of the country -- handed out) is actually translating into votes or not? In some areas, some political parties possibly ensure that through muscle power and the menacing barrel of a gun pressed against the temple. But, otherwise, it is damn difficult to figure out the ROI on the cash doled out. The logic must be: Pay the cash and hope for the best. In poll parlance, ROI probably stands for Rely On Inspiration.