Santosh Kumar Mohapatra
Across the globe, economy has hit a bad patch. The damage inflicted by Covid-19 is getting worse. In term of economic activities and GDP, its repercussions will be worse than that of the Great Recession of 2008 — and might perhaps be lesser than Great Depression of the 1930s. India’s GDP growth may be plunged to negative territory in 2020-21. A negative growth was last seen in 1980. Asia’s growth too might decline to zero or worse for the first time in 60 years.
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As a result, the number of people expected to be dragged into the quagmire of poverty, hunger, starvation and squalor will be unprecedented. Former RBI governor Raghuram Rajan sees the economic fallout of the coronavirus pandemic as the “greatest emergency” India has faced since Independence. According to SBI’s research, the lockdown will burn Rs 12 lakh crore on India’s economy.
The need of the hour is to provide more aid and assistance to people and restart the sagging economy, ensure food security for all, strengthen the ageing health infrastructure, sustain job security, prevent retrenchment, and support the workforce in the unorganised sector. Rajan suggests that expenditure be prioritized and less critical spending be pushed back.
The herculean task now is: how to finance the ballooning expenditure when tax collection is receding due to sinking economic activities. There is little possibility of raising additional taxes. Steps like imposing wealth tax, recovering taxes locked in dispute, curbing tax evasion, or asking the rich to donate more and bring back money kept in tax havens must be attempted.
As the government fails to finance its increasing spending either through tax or non-tax revenues, it will run huge fiscal deficit; excess of expenditure over non-borrowed receipts. The conventional budget deficit had been done away with since 1997-98. The main method of financing the fiscal deficit is via debt financing.
Further, if debt does not lead to growth and fails to add sufficiently to the future revenue stream, it may be difficult to meet future obligations and the government may fall into a debt trap. Higher borrowing to finance escalating deficit is not advised. It may lead to a serious debt crisis. Other options are monetisation of spending or the creation of new money. The monetisation of spending can be done via two ways. One is to directly finance the fiscal deficit, known as ‘monetisation of deficit’ or money finance or debt monetization; and another is “Helicopter Money”.
The monetisation of deficit can meet the increasing spending needs of the government and provide for targeted fiscal stimulus possibilities without increasing public debt. This refers to the exercise of RBI purchasing government bonds directly in the primary market and financing this debt by printing more currency. RBI prints currency and gives credits to the government. New money can be transmitted through established fiscal policy channels to areas where it is most-needed. This is similar to the system of Quantitative Easing (QE) practised by the US, Japan, the UK, and the rest of the Eurozone.
Though the government has to repay the credit received from RBI through monetisation of deficit, it gets higher dividend too as RBI’s seigniorage profit increases. Former RBI governor C Rangarajan as also Bimal Jalan, former fiancé minister Yashwant Sinha, and Nobel laureate Abhijit Banerjee suggest that the RBI partly monetise the government’s fiscal deficit to meet increasing expenditure especially when tax revenues are severely affected.
Helicopter Money is an unconventional monetary policy tool devised by Milton Friedman. It signifies unexpected dumping of money onto a struggling economy with the intention of extricating it out of a deep slump. It involves printing money by RBI and the government distributing the same to the public with the aim of boosting demand; like a helicopter dropping money from the sky. Some analysts say Japan is resorting to this.
Problem with helicopter money is, it is basically non-repayable and does not form part of the budget, fiscal deficit or public debt. However, the Centre, if it resorts to this, may transfer a larger portion of such money to states so that they can undertake developmental works. It is argued that both “monetization of deficit” and “helicopter money” are hints of a government’s profligacy. India had abandoned it in 1997 as both led to higher inflation.
The writer is an economist based in Odisha.
