The US, the European Central Bank, Japan, and even emerging economies such as Turkey and Indonesia are printing money to bring economies back to life. So must India. Here’s what this stimulus means, and what India can do.
What is Printing Money?
1] CENTRAL BANK DIRECTLY BUYS GOVT DEBT/BONDS
This injects cash into economy Akin to printing new money, though done electronically
2] CENTRAL BANK BUYS BONDS FROM CORPORATES, LENDERS
Seller is able to get rid of illiquid assets and deploy funds elsewhere
What are Major Economies Doing?
1] US Fed Reserve Used it extensively to counter 2008 crisis Same template in use for Covid crisis
2] European Central Bank Has removed the limit on bonds it can buy from any single Eurozone country
3] Bank of England Ready to temporarily lend money to govt, if needed
4] Bank of Japan will buy unlimited amount of govt bonds
What Did India Do Earlier?
Debt monetisation by RBI was the norm in 1980s, and up to late 1990s Govt deficits were monetised through ad hoc treasury bills
In 1994, curbs were imposed under a pact between RBI and govt Arrangement phased out after 1997 But this continued in another form — with RBI picking up unsubscribed public debt auction
FRBM Act, 2003, barred RBI from buying primary issuances of govt debt
What India Can Do?
1] Economy needs massive fiscal stimulus ET estimates 9-10% of GDP must be spent This translates into Rs 18-20 lakh crore Budgeted borrowing in FY21 is Rs 8 lakh crore
2] Market cannot support this borrowing
3] Interest rates will rise sharply
4] Pvt sector/other borrowers will be denied credit
5] High interest rates/lack of credit will kill economic activity
6] So, only RBI can provide such funds by printing money
Some economists say injection of fresh demand can distort macro-balance. They point to possibility of:
1] High inflation
2] High current account deficit
3] Currency depreciation
4] Reckless spending could fuel NPAs
But massive economic contraction makes these unlikely
1] Deflation, not inflation, is real risk with demand crashing
2] Current account not a concern as there’s barely any trade
3] Crude prices are low, and are likely to remain so
4] Risk of credit binge low in current environment of caution
This is the time for wartime financing, and normal rules can’t apply. Printing money will generate demand, kickstart projects, help businesses and employees and workers. And given the steep economic dip, risks of overheating are trivial. GoI and RBI must opt for printing money. Procedural caution may kill the India story.