4 Min Read | June 11, 2021
“In my view, this is the time to expand the balance sheet of the government, duly supported by the RBI, monetary expansion or printing of money.” -Uday Kotak
“At the moment, the borrowing requirements of both States and the Centre have been handled very successfully last year. No plan to print more currency notes” - RBI Governor, Shaktikanta Das
Given above are examples of views revolving in the finance world regarding printing money to plaster the crippled Indian economy. The champions of the economy have a divided view on this issue, where some believe that printing money is the last resort and while others believe that limited printing of money would do wonders amid this extraordinary situation.
Well, Convey Warriors, I am pretty sure that there must be multiple questions running through your mind after reading the premise. For instance:
What is money printing?
How does printing money affect the economy?
Who prints money and when to do so?
Are there any positive effects of printing money?
As always, we have got you covered!
So, spare a few minutes to the following blog and you certainly get acquainted with the ongoing discussion and debates regarding the printing of money.
In 2020, as the Covid-19 gripped the world under its paws pushing all the nations towards lockdown, the governments had to introduce stimulus packages, give tax breaks and other reliefs in order to combat the issue.
In addition to this, the spending capacity of people reduced because of two main reasons. The first one being the fear of unemployment (mainly during the lockdown) and the second one being the crunch in demand of non-essentials as well as restricted movement as per Covid norms. People were focused more on having a financial backup for an unprecedented crisis
As a result of these two factors, the government ended up exhausting its budget and due to decreased spending by people the revenue realisation was also poor.
Finally, the fiscal deficit soared up!
For those who are unaware, a fiscal deficit is the total amount of money that is borrowed in order to fill the gap between revenue collected by the government and the spending it makes.
Just like most of the nations, the case of India is no different.
The government’s finances are extended beyond the permissible limits and with reduced income, the consumption of people has fallen too. Thus, the fiscal deficit shooted to 9.3% of the GDP. Well, things were getting better after steadily but then came the second wave of Covid in India! According to the estimation made by the government, the fiscal deficit for 2021-22 would hover around 9.5% of the GDP
The following graph shows the fiscal deficit of India over the years.
Practically speaking, after the second wave the status of the economy has stalled and it would not be collecting fancy revenues as well. You must be wondering that in such situations what does a government do in order to pull the economy on track, right?
Let us understand that!
Generally, whenever the fiscal deficit of any country goes beyond a permissible level, the government borrows money from the market by selling bonds or raising taxes so as to meet the spending requirements. But, studies have shown that given the pandemic the savings (of people) has been falling and not much of that money is going into the market or economy.
So, this rules out the option of borrowing money from the market and raising taxes too! This leaves the government with another option to tackle the issue and that is printing more money or ‘direct monetization’.
In simple terms, direct monetization is a scenario where a central bank (RBI in India) prints more money to buy bonds from the government and in turn, the government uses that money to float in the economy. Thus, the government fine-tunes its fiscal deficit.
In the case of India, RBI would get government bonds in exchange for printing more money and the government will have to pay back the money to RBI on a specified date.
Sounds like a smooth solution right?
Also, you must be thinking if it is so easy to stimulate the stalling economy then why hasn’t India done it already!
Why not print more money and provide it to people in need as well as use it for combating the disastrous effects of the pandemic?
Well, dear readers, it is not as easy as it sounds and we will discuss it in the following section!
To begin with, the idea of direct monetization of printing money under such unique circumstances is a contested matter.
One of the prime issues with resorting to this tool is not the start but then the end. Generally, printing money gives the government a chance to ramp up the overall demand in the market when it falls, like what is happening in current times. But, if the government makes even a little delay in stopping the printing of more money, the result can be catastrophic.
You must be thinking how? Right?
Here is how the ‘end’ matters!
Why don’t you imagine a situation where India decides to print more money in order to boost the economy. Under such a situation, the printed money would undoubtedly uplift the incomes of people (which has been affected currently) directly raising demands in the market.
Are you wondering, how?
Well, with the rise in individual income, the purchasing power will increase. But, remember one point here that the supply will be the same as before. Ultimately, the demand would go up, pushing the prices further up.
Now, by the rule of supply and demand, the increase in demand would add fuel to inflation. This is where the problem can arise. For any economy or market, a little surge in inflation is fine because it ultimately boosts business activities. But, if the government fails to stop printing money at the right time, more money will float in the market. Finally, pushing the inflation even further!
The economy would end up in high inflation and the government with high debt (that it will have to pay to RBI).
If you are thinking that this premise is just in theory, the answer is no!
Such a situation arose in Zimbabwe where its economy went into hyperinflation due to printing money (and not stopping at the right time). So much so that in 2008 alone the prices of commodities surged to 231,00,000%.
Therefore, printing money can do wonders in a given situation where the Indian economy is not in the pink of its health. But, this magical wand comes with its risks as there are disadvantages to printing money.
Many proponents of money printing have been stating the fact that many developed economies such as the UK, the United States and China have printed more money in the last few years in order to bring their economies back to life after Covid.
In fact, some of the developing economies such as Indonesia and Turkey resorted to this step.
One of the most cliche arguments that persist in opposition to printing money is that the government would be inefficient in making the right spending choices. This means that if India proceeds with the idea of printing more money to revive the economy, the government will have to work in multiple dimensions and keep an eye on the credibility of the fiscal expenditures.
Everything about finance, so nothing is left.
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