Amid demands from several sections that India needs to print cash to kick-start an economy battered by the COVID-19 second wave, and for protection of jobs in the affected sectors, the Reserve Bank of India has denied any such plans.
“… the borrowing requirements of both states and the Centre had been handled very successfully last year,” RBI Governor Shaktikanta Das was quoted as saying in a report by The Hindu.
What is Money Printing?
The government asks the RBI to print new currency for new bonds that the government places with the RBI. The government can spend this new cash to stabilise the economy by investing and spending in building infrastructure or giving hard cash to the poor, who can then spend thus boosting the failing economy.
Why Government Bonds?
In this case, the government has to repay the money it borrowed from RBI at a specific date. The government cannot afford to default the promised sum to RBI under any circumstance. RBI in turn, shows a healthy balance sheet.
Is it Different from ‘Indirect’ Monetising?
This route, if taken, is different from the indirect monetising that RBI undertakes once in a while. In this scenario, they conduct open market operations (OMOs) by purchasing bonds in the secondary market.
Why the Demand Now?
The affected sectors believe that if the government is flush with funds, it could inject a huge stimulus to combat the damage wreaked by COVID-19. They see monetisation as a way for the government to provide relief to the poor and the affected small businesses on the verge of shutting down.
Has India Done it Earlier?
India resorted to debt monetisation in the 1980s that went up to the late 1990s, and it was the norm for the government. The deficits were monetised through ad hoc treasury bills, which were finally phased out after 1997. In 1994, a pact between RBI and the government resulted in curbs being put in effect.
Post-1997, the government circumvented these curbs by asking the RBI to pick up unsubscribed public debt. Finally, the FRBM Act, 2003, barred the RBI from buying primary issuances of government debt.
Lest we forget, India had mastered the art of money printing, and the payment crisis it saw in 1991 and the 2013 scare was a result of these fiscal deficit balancing acts.
What Can be Done Now?
The Indian economy needs a boost, especially since the finance ministry hasn’t announced any stimulus package after the second wave. According to The Economic Times, the budgeted borrowing in Financial Year 2021 is Rs 8 lakh crore, and the market cannot support this number. The end result would be interest rates rising sharply, denial and/or lack of credit to the private sector, which will kill the economic activity.
What are the Cons?
The risks are high even if the government resorts to money printing. It should maintain a fine balance and it indeed it will be a tight rope walk for the RBI governor. If it gets out of hand, India could end up being another Venezuela or a Zimbabwe.
What are Other Countries Doing?
Hardly two months ago, the UK voted for this, with the Bank of England offering direct monetisation facility to the UK government despite objections from the governor of the Bank of England. Japan will buy an unlimited number of government bonds, and the EU has removed the limit on bonds it can buy from any single Eurozone country. The US had done this in 2008, and again last year, when the US Federal Reserve printed a little over $3 trillion in order to counter the economic impact of COVID-19.
(Edited by: By Shoma)