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Here's why India doesn't just print a lot of money to eradicate poverty

Many of the global economies are responding to the COVID-19 induced recession by adopting unorthodox measures

Heres why India doesnt just print a lot of money to eradicate poverty

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  17 Sep 2020 5:41 AM GMT

Guwahati: At a time when many of the major economies across the world have been pushed into recession owing to the coronavirus outbreak, many of the global economies are responding to the COVID-19 induced recession by adopting unorthodox measures. To bring economies back to life, the United States, the European Central Bank, and Japan are printing money to revive their respective economies.

India, however, is yet to take such a step although the the Q1 financial year 2020-21 GDP deceleration of 23.9% is the highest among major economies of the world. Because of this, the chorus is growing in India for monetization of the fiscal deficit. In layman's language, printing more money to boost the ailing economy.

For the uninitiated, fiscal deficit is the difference between the total revenue or income of the government less than its expenditure.

In 2019-20, the central government's income through taxes, GST and other receipts were Rs 19.32 lakh crore, whereas its expenditure on schemes, subsidies, and infrastructure, interest payments were Rs 26.98 lakh crore. Thus, the fiscal deficit was Rs 7.66 lakh crore. The figure was 3.8% in FY 2019-20.

The government borrows money from the market to finance the fiscal deficit. It usually issues bonds which are subscribed by individuals and institutional investors.

They lend money to the government with the promise of future payment. These bonds carry a lower rate of interest than what is available to corporates/individuals, as they are considered as risk-free.

Owing to the coronavirus pandemic this year, the central government has hiked the market borrowing for this year to Rs 12 lakh crore from Rs 7.8 lakh crore presented in the Union Budget.

It is pertinent to mention here that governments spend more than they earn as politicians and policymakers rely on fiscal deficits for their popular policies/schemes, such as welfare programmes and public works, to garner support ahead of polls.

Monetisation of fiscal deficit refers to the purchase of government bonds by the central bank, i.e. the Reserve Bank of India.

Since the central bank creates fresh money by simply printing to buy these bonds, in layman's language, monetisation of deficit means printing more money. This helps finance the spending needs of the government.

To explain things in layman's terms, government spends this money on infrastructure projects which creates jobs, having a multiplier effect on the economy. This money could be used by the government to provide more funds for its welfare schemes, NREGA, transfers to Jan Dhan accounts, etcetera which then provide a fillip to consumption, which has been badly hit by the pandemic.

In the past, when countries have tried printing money, it has led to increase in prices as sellers take charge higher rates. In countries where this happened, such as Zimbabwe and Venezuela, it resulted in hyperinflation.

In Zimbabwe prices rose as much as 231,000,000% in a single year in 2008. Truly baffling, isn't it?

Thus, in India, experts are divided on whether the RBI should print money to revive the economy. While some have cautioned against the move, others say limited monetisation can be undertaken given the extraordinary situation.

The money received by the government from the RBI can be used to fund higher spending and protect the economy, the poor and vulnerable in these abnormal times.

High government borrowing from the market can raise interest rates and deny credit to the private sector.

Monetisation of fiscal deficit/printing of money can avert this situation but there are risks of high inflation and currency depreciation apart from a general deterioration in macroeconomic balance.

A section of economists believes that some of the newly emerging economies like India have far lesser room to support local economies than developed markets.

To sum up, it's not an easy decision: one needs to weigh the pros and cons. Also, it's not just an economic, but a political decision as well.

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