Skip to main content

Elephant in the Room-General Elections, reduce GDP(Gas,Diesel,Petrol)prices to boost GDP!!!

 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!

Labels:

Comments

Post a Comment

Popular posts from this blog

Hanuman and Ganesha!

  The two major loved deities of the Hindu pantheon are Hanuman and Ganesha. Let us dwell into the concepts and significance of these two dieties. Ganesha, the son of Parvati and Shiv, is worshipped first before starting any new job or work. Even if you want to start writing or reading , you invoke the blessings of Lord Ganesha who goes under various names- Ganapathi, Vigneshwar, Vinayak, and  Pillayar in Tamilnadu. Ganesha Gayathri, Pancharatnam are some of the important Ganesha mantras and hymns. Adi Ganesha idol is in a Temple near Tiruvarur in Tamilnadu with a human face.The mythological story says that Shiv slew His head and then fixed the head of the animal that He saw first after this beheading of His son. Ganesha after that with the elephant head is worshipped as the wisdom god by Hindus. Why only Hindus. He is worshipped in Indonesia where He finds Himself in their currency notes. He is considered the destroyer of evil in Japan. In Mexico, Ganesha idols were said to h...
Post a Comment
Read more

Shrinking middle class in India?-Data show Growing Middle class!

  Key Findings from the SBI Eco wrap Report(25th Oct 2024) Income Inequality is Decreasing : The report uses the Gini coefficient to demonstrate a decline in income inequality in India. The shift is most noticeable in lower income brackets, with a substantial portion moving into higher income groups. This aligns with a rightward shift in the income distribution curve. ITR Filings are Increasing : The number of ITR filings has significantly increased, indicating a growing tax base. This growth is particularly evident in previously untapped states (Uttar Pradesh, Bihar, etc.), suggesting broader economic participation.Below is the chart which shows No. of tax payers in Different income Group in AY2014 and AY2024 which clearly shows that the bulk have moved up from Rs.1.5lac to Rs5 lac to Rs.2.5 lac to Rs.10 lac(highlighted in yellow colour) Growth in 'Crorepati' Taxpayers : The number of taxpayers earning over ₹1 crore has increased significantly, highlighting the expansi...
Post a Comment
Read more

State of the Indian Economy: Navigating Global Uncertainties

 The global economic landscape is rapidly evolving, with trade policy uncertainty emerging as the key driver of the near-term outlook. Recent US tariff announcements have stoked fears of a global trade war, with countries still working out their appropriate responses in this uncertain environment. Despite these external headwinds, the Indian economy has exhibited marked resilience. Although the weakening global economic outlook could impact overall growth through weaker external demand, India's domestic growth engines - consumption and investment - are relatively less susceptible to external pressures. Prospects for the farm sector have been boosted by the forecast of an above normal southwest monsoon for 2025, which could augment farm incomes and keep food prices under check. Headline inflation moderated to a 67-month low of 3.3% in March, mainly due to moderation in food prices. Global Economic Outlook: Trade Tensions and Market Volatility The global economic landscape is facing ...
Post a Comment
Read more