The ongoing general elections have thrown up a problem of plenty for the government – its cash balances are much higher than before the previous two Lok Sabha polls, but curbs on spending mean that banks are parched of funds while the Centre tries hard to prevent the money from sitting idle.
The adoption of more efficient fund management practices by the Centre, healthy tax collections and a build-up of cash by state governments have resulted in overall government cash balances swelling past ₹3 lakh crore and locking out funds from the banking sector.
As a result of the constraints on spending during a long-drawn national election, government expenditure – which traditionally flows through banks – has moderated, leading to a tight money market and, consequently, higher borrowing costs.
“Government cash surplus – Centre-plus-states – is currently tracking at ₹2.5 lakh crore as on May 17, which is significantly higher than the same period last year at ₹1.4 lakh crore as of May 19, 2023,” said Gaura Sengupta, chief economist at IDFC First Bank. “In FY20, which was the last general election year, overall government cash surplus was lower at ₹40,000 crore as of May 17, 2019.”
The government’s cash balances have likely crossed the ₹3 lakh crore mark after the latest round of goods and services tax (GST) collections.
As of May 16, 2014, just a few days after the general elections that year, the cash balance of the Centre and states was at a deficit of ₹94,000 crore, implying that government expenditure was in full swing.
The matter has been compounded by the strides taken by the Centre in the adoption of ‘just-in-time’ cash management. While the relatively new practice has yielded greater efficiency in cash management for the government, it has left banks starved of the huge float of liquidity they earlier enjoyed as the Centre now releases funds on the specified date unlike in the past when it would transfer funds weeks in advance.
“Another factor for accumulation of large cash surplus (this year versus previous election years) is better cash management by the Centre with the implementation of just-in-time cash management for expenditure on schemes – central sector schemes and centrally sponsored schemes,” Sengupta said.
Over the past year, the Reserve Bank of India (RBI) has often spoken about how the ebb and flow of government expenditure has a major exogenous impact on liquidity conditions in the banking system. From May 1 to May 23, daily average deficit liquidity, as measured by banks’ borrowings from the RBI, was at ₹1.4 lakh crore, the latest central bank data showed.
The RBI has taken steps to infuse liquidity, with the central bank having held eight rounds of fine-tuning variable rate repo operations and two rounds of main 14-day repo operations so far in May.
The government, on the other hand, has also been trying to buy back some of its outstanding bonds, so as to make good use of the large cash balance it is sitting on and bring down interest costs. However, these operations have been largely unsuccessful as the Centre and its debt manager – the RBI – have been unwilling to buy back bonds at high prices from banks.
In 2021, the government began a new model of cash management – the Single Nodal Agency (SNA). This involved an SNA account set up with banks for central sector and centrally sponsored programmes. Under this model, funds sit in the account for some time before payouts are made.
The Centre has now moved toward a model called the SNA SPARSH, which aims to bring about just-in-time releases for centrally sponsored programmes and central and state consolidated funds.
