The second wave of the Covid-19 pandemic has put immense pressure on the Indian economy and many prominent voices have urged the government to increase its expenditure and announce relief measures to tide over the crisis.
Some experts and industry leaders suggest that increased expenditure and more relief measures can be achieved if the Reserve Bank of India (RBI) increasing printing currency.
Some individuals have called for more cash printing including billionaire banker Uday Kotak. He said, “This is the time to expand the balance sheet of the government, duly supported by the RBI… for monetary expansion or printing of money.”
Nobel laureate Abhijit Banerjee and former finance minister P Chidamabaram also suggested that printing money is an ideal way to support expenditure during the ongoing second wave of the pandemic.
While Banerjee said that the additional cash printing will help in direct cash transfers to poorer sections of the society, Chidambaram said the government should “act boldly and spend” by borrowing or printing more money.
“This is not the time to worry about the fiscal deficit. So what if the deficit widens to 6.5%? We can’t lose another year like we lost the last year. But the way the government is reacting, we are going to lose another year. My advice to the government is to act boldly and spend. Borrow or print money and spend,” Chidambaram said.
ADDITIONAL CASH PRINTING
When the government is required to increase its expenditure beyond budgetary allocation in view of a crisis situation, the central bank has the option of printing more money to support the additional liquidity requirement.
The process of spending more money by a government, known as deficit financing, can be achieved by borrowing or minting more money to increase liquidity in the economy.
The central bank has various options to increase liquidity, but it may not be a viable solution as it will not lead to a rise in economic output.
While additional money printing is likely to increase the demand for goods and services, it may lead to a sharp rise in inflation if the economic output fails to support demand. In turn, there will be a sharp increase in prices of existing goods and services as the demand will rise, but supply won’t.
Simply put, the problem with printing money for emerging and poorer economies is a sharp rise in inflation — something that could cause more harm than good. Another problem with printing more money is a decline in currency value due to higher inflation.
However, it is not always a harmful prospect. For instance, additional money printing is a strategy that many developed nations adapt to fight a recession. The US has done it during the Coronavirus pandemic to make credit easily available at lower interest rates. But it has also expressed the need to gradually taper the additional stimulus in view of upside risk to inflation.
While the strategy seems to have helped the US tackle the pandemic-induced economic crisis, it may not be an ideal prospect for an emerging economy like India.
WILL IT HELP INDIA?
Former RBI governor D Subbarao recently said that India’s central bank can directly print money and finance additional spending by the government. However, Subbarao added that it should only be done if there is absolutely no alternative.
Subbarao clearly mentioned in an interview with news agency PTI that India is “nowhere” near such a scenario. He suggested that the government can consider Covid bonds as an option to raise borrowing as part of budgeted borrowing to deal with the economic slowdown during the second wave.
“It (RBI) can (print money) but, it should avoid doing so unless there is absolutely no alternative. For sure, there are times when monetisation despite its costs – becomes inevitable such as when the government cannot finance its deficit at reasonable rates,” Subbarao said.
“We are nowhere near such a scenario,” he added.
Subbarao further said that people who have called for additional money printing do not realise that the central bank is indirectly printing money even now to finance the deficit.
Giving an example, he said when the RBI buys bonds under its open market operations (OMOs) or buys dollars under its forex operations, it is printing money to pay for those purchases, and that money indirectly goes to finance the government’s borrowing.
“The important difference though is this when RBI is printing money as part of its liquidity operations, it is in the driver’s seat, deciding how much money to print and how to channel it into the system,” Subbarao noted.
A few days ago, RBI Governor Shaktikanta Das also commented on the matter amidst calls for printing more money. He said, “It is a very hypothetical question at this point in time”.
When asked about RBI’s views on deficit financing to support the economy, “Central Bank with regard to printing of notes have their own models and assessment. The RBI takes a decision based on so many complex factors which relate to financial stability, inflation level, stability of the exchange rates, etc.”