{"id":128856,"date":"2021-06-15T07:38:16","date_gmt":"2021-06-15T07:38:16","guid":{"rendered":"https:\/\/precoinnews.com\/?p=128856"},"modified":"2021-06-15T07:38:16","modified_gmt":"2021-06-15T07:38:16","slug":"should-rbi-print-money-and-finance-govts-fiscal-deficit","status":"publish","type":"post","link":"https:\/\/precoinnews.com\/business\/should-rbi-print-money-and-finance-govts-fiscal-deficit\/","title":{"rendered":"Should RBI print money and finance govt’s fiscal deficit?"},"content":{"rendered":"
Experts disagree with the idea and the RBI, which has the sole right to print money, is not comfortable with it as well.<\/strong><\/p>\n <\/p>\n Nobel Laureate Abhijit Banerjee, in May, said India should print money to finance the government’s fiscal deficit, offering advice for an economy devastated by a second wave of Covid-19 infections.<\/p>\n Experts disagree with the idea and the Reserve Bank of India (RBI), which has the sole right to print money, is not comfortable with it as well.<\/p>\n Here are key things to know about printing money to finance deficit.<\/p>\n How money is printed<\/strong><\/p>\n The RBI has two ways to infuse money in the system.<\/p>\n One is by buying dollars from the market while infusing rupee liquidity in return.<\/p>\n The second way is to buy government bonds from the secondary market and pump in liquidity.<\/p>\n These are two generic ways to infuse money.<\/p>\n The central bank expands its balance sheet through foreign currency assets when it purchases dollars.<\/p>\n When it buys government bonds, the expansion is made by buying domestic assets.<\/p>\n What is deficit financing by printing money<\/strong><\/p>\n Buying bonds from the secondary market to infuse liquidity is an indirect way of financing the government’s fiscal deficit.<\/p>\n There is a direct way as well: when the government privately places bonds with the RBI. India used this system in the mid-1990s when the government placed ad-hoc treasury bills with the RBI.<\/p>\n Fiscal deficit was automatically monetised through ad-hoc treasury bills, which were issued by the RBI on behalf of the Centre to itself at a fixed rate.<\/p>\n RBI is the government’s merchant banker, managing its fund raising programme.<\/p>\n It issues government bonds to the banks to raise the funds.<\/p>\n Simply put, RBI subscribed the bond issues it hade made.<\/p>\n When Chakravarthi Rangarajan was the RBI governor in 1997, the policy of automatically monetising the government’s fiscal deficit was discontinued.<\/p>\n Why direct financing of deficit is being demanded now<\/strong><\/p>\n There is again a debate whether India should undertake automatic monetisation of the deficit, given the hurt to its economy.<\/p>\n Some former central bankers have supported such a move.<\/p>\n It is an unconventional policy also known as helicopter dropping of money: a term coined by American economist Milton Friedman in 1969.<\/p>\n India’s GDP contracted by 7.3 per cent in 2020-21, the first time it happened so in 40 years.<\/p>\n Various quarters want more money pumped into the economy to revive GDP growth.<\/p>\n The RBI took a growth-supportive stance after the pandemic broke out last year, reducing the repo rate by 115 bps between March and May of 2020.<\/p>\n Further interest rate cuts were not possible after that though: repo rate is at 4 per cent, while average retail inflation in FY21 was 6.2 per cent and for FY22 it is projected at 5 per cent.<\/p>\n The RBI opened a liquidity tap in April–namely Government Securities Acquisition Programme–to buy government bonds from the secondary market.<\/p>\n RBI governor Shaktikanta Das recently announced the second version of the G-SAP.<\/p>\n G-SAP 1.0 was worth Rs 1 trillion; G-SAP 2.0 will be of Rs 1.2 trillion and it will buy state government bonds as well.<\/p>\n Das also announced keeping the repo rate unchanged.<\/p>\n What are the drawbacks of such a move<\/strong><\/p>\n There is an argument that the central bank is printing money and buying bonds from the secondary market, so the objective of economy stimulus is fulfilled.<\/p>\n Hence, there is no need for a direct purchase on bonds.<\/p>\n “I am not in favour of such a move that is private placement of bonds to RBI by the government,” said Indranil Pan, chief economist at Yes Bank.<\/p>\n “The RBI, through its balancesheet and its participation in the secondary market, is doing exactly that (pumping money).<\/p>\n “Quantitative easing…open market operations etc, is happening in any which way.<\/p>\n “The whole reason why the private placement was taken off was to guide the government towards a discipline towards its borrowing and fiscal deficit,” Pan told Business Standard<\/em>.<\/p>\n There is apprehension that such direct financing of the deficit will hurt fiscal prudence.<\/p>\n The country has repeatedly pushed back its target of achieving 3 per cent fiscal deficit.<\/p>\n Pan said that direct monetization of the deficit can have a bearing on maintaining fiscal discipline.<\/p>\n “Till the point in time RBI, with all the tools, was able to cap the yield movement – the purpose was achieved,” he said.<\/p>\n RBI’s view on the issue<\/strong><\/p>\n The central bank has managed the borrowing programme well.<\/p>\n It managed, in the last financial year, a government borrowing of Rs 12.8 trillion rupees, at rates lowest in 16 years.<\/p>\n The government has announced, for this financial year, a borrowing of Rs 12.05 trillion.<\/p>\n The figure is likely to rise due to an anticipated shortfall in GST revenue collection.<\/p>\n The yield on 10-year government bond has been hovering around 6% since G-SAP 1.0 in April, allowing to RBI say the borrowing cost is under check as bond yields are under control.<\/p>\n Governor Das made this point recently.<\/p>\n “Regarding the printing of notes, the central bank has their own models and their own assessments.<\/p>\n “The central bank, with regard to printing notes, takes the decision on the basis of many complex factors, relating financial stability, inflation, exchange rates,” he said during the post-monetary policy interaction with the media.<\/p>\n “RBI has been managing the borrowing requirements of the states and centre very successfully.<\/p>\n “Last year the borrowing rates were lowest in 16 years.<\/p>\n “This time also RBI has taken measures in terms of GSAP 1.0 and GSAP 2.0.<\/p>\n In addition to Rs 60,000 crore auctions under GSAP 1.0 done so far, RBI has injected another Rs 36,000 crore.<\/p>\n “The borrowing is going on smoothly,” he said, indicating his views on the issue of automatically financing the government’s fiscal deficit.<\/p>\n