Elections, particularly in India, can indeed have an impact on its economy, including liquidity and inflation. During election periods, State governments of India often increase spending to buttress their election campaign and implement populist measures to attract voters. However this GOI has eschewed its temptation to loosen its purse strings. However it has increased its Capex infra projects which can generate assets and have a trickle down effect in the income of the people. But this increased government spending at State levels can potentially lead to higher liquidity in the financial system.
If the increased liquidity is not matched by an increase in productivity or economic growth, it can potentially lead to inflationary pressures. In such situations, central banks like the Reserve Bank of India (RBI) might need to adopt tight liquidity management policies to rein in inflation. Tight liquidity management involves reducing the money supply in the economy by selling government securities, increasing interest rates, or implementing other measures to absorb excess liquidity.The Reserve Bank of India (RBI) is likely to face the challenge of managing liquidity in the run-up to the 2024 general elections.
This is the Elephant in the Room of both GOI and RBI for them to deftly handle!
The RBI will need to use a variety of tools to manage liquidity, such as open market operations, repo rates, and cash reserve ratio. It will also need to closely monitor inflation and financial market conditions. If inflation starts to rise too quickly, the RBI may need to tighten monetary policy. However, this could dampen economic growth.
The RBI will need to strike a delicate balance between managing liquidity and supporting economic growth. It will also need to be mindful of the political implications of its decisions. If the RBI is seen as being too hawkish, it could alienate the government, upset favourable business conditions and jeopardize its chances of re-election.
Here are some of the specific measures that the RBI could take to manage liquidity in the run-up to the 2024 general elections:
- Increase the repo rate: This is the rate at which the RBI lends money to commercial banks. By increasing the repo rate, the RBI makes it more expensive for banks to borrow money, which reduces the amount of liquidity in the system.
- Sell government bonds in the open market: This reduces the amount of money in the system by draining it from the banking system.
- Raise the cash reserve ratio: This is the percentage of deposits that banks have to keep with the RBI. By raising the cash reserve ratio, the RBI reduces the amount of money that banks can lend out, which reduces the amount of liquidity in the system.
The RBI will need to carefully monitor the situation and adjust its policies as needed. It is a challenging task, but the RBI has a good track record of managing liquidity in the past.
On 31st August India's Q1 FY24 GDP is expected to be announced which may come at 7.9% to 8%.This high percentage may be due to subdued Q1 of FY23 revealing low base effect.Even though GST and Income Tax collection have remained buoyant in Q1 FY 24, Corporate Tax collections have languished indicating a K shaped recovery in the economy.
Considering the Inflationary effects and the likely Q1 GDP nos. Govt is expected to face a dilemma shortly. It is also the question of Short term inflation versus Long term inflation. GOI must consolidate its limited available revenue resources without upsetting its Fiscal deficit calculations ,inorder to rein in short term Inflation immediately and for that to happen Govt must look at reducing a different GDP! Yes, this is a different GDP-Gas,Diesel and Petrol- taxes levied on them must be reduced to contain Inflation in the short run inorder to give a boost to real GDP in FY 24 before Lok Sabha elections!
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