Major worldwide economies are taking unorthodox stimulus measures, including printing excess money to battle the pandemic-led disruptions. The United States, Europe, Japan, and even developing countries like Indonesia and Turkey are printing money to revive their economies.
Since the infancy of the COVID-19 pandemic, there has also been a constant buzz on whether India should also follow (1).
However, first, let’s look at how printing money works and how it can help save our pandemic hit economy?
Why Do Governments Print More Money?
A short answer is to increase liquidity in the market.
When governments print more money, it reaches the masses, and it boosts the overall demand when there is a drop in the public demand like it has been recently.
Economically, it is called monetizing the financial deficit. The RBI, Reserve Bank of India, purchase government debt directly instead of the government borrowing it from the markets by selling bonds. In turn, the reserve bank prints more money to finance the debt.
It enables the government to spend and address economic stress through direct benefit transfers to the public or start new projects, offer wages and subsidies to small and medium enterprises (2).
Why are Some Experts Recommending India to Print More Money?
Everyone wants the Indian government to do more. There is a demand for more relief measures for people who lost their livelihoods, revival packages for businesses, fiscal help to states, more spending on health, and so on amid the pandemic.
There is a near-unanimity among experts on how the country would finance all this. And since there is no financial headroom, printing more money and spending it on the unprivileged and troubled businesses, printing more notes is an option for India.
Notably, the usual price of printing more money under the normal circumstances would be considered highly irresponsible since it can lead to inflation or a foreign exchange crisis, or both. More on that in a minute or so.
But how much money would India need? Well, no one can know for sure.
Experts are also defining a possibility that India is far from recording growth and will instead shrink this year (3), especially considering that about half of India’s GDP, Gross Domestic Product, comes from manufacturing, transport, trade, construction, financial, entertainment, and hospitality sector, which are still grappling to recover after the second COVID-19 wave. Consequently, there has been a raft of declines in growth estimates.
And against this backdrop, there have been calls from India Inc (4) for a large fiscal stimulus, including printing money to revive the economy and help businesses flattened by the pandemic.
The country’s leading banker, Uday Kotak, had also vouched for the same. He had shared insights with the media, saying that India needs to print more cash to support the grappling economy amind the pandemic’s second wave. He had stated,
“it is the time for India to expand its balance, duly supported by the RBI for monetary expansion. Time has come for us to do something, if not now, then when?”
According to C Rangarajan, the former RBI governor’s talks with the Times of India (5), the government needs to keep its expenditure high.
The budget highlights a 6.8% financial deficit of the GDP for the center, and the states have another 4%, meaning their combined deficit is about 10.8% of the GDP.
The expenditure amid the pandemic will exceed the center’s deficit from 6.8% to 7 to 8% of the GDP. The Indian government has assumed a nominal income of 14.4% for FY 2021-22, and considering the present scene, it will only be about 13.4%, 1% point less.
C Rangarajan explains that the gross tax revenue the government has assumed is unlikely to be met, and non-tax revenue would also be low despite the RBI’s dividend. Hence the center’s fiscal deficit will be 7 to 8% of the GDP.
Such a level of fiscal deficit will need the government to borrow large amounts with the RBI’s support. Notably, the RBI is already pumping in huge amounts of liquidity via several operations.
The government would also need to increase its expenditure to increase healthcare infrastructure and vaccination. The center has already provided 35k crore INR in the budget for the vaccination, and the figure may get doubled, said C Rangarajan. He further added that, in a way, monetary expansion is already happening indirectly.
Now, coming to another point, a Reuters survey revealed that the Indian government’s stimulus package last year (worth about 25k crore INR) was not enough to boost the economy. It conducted a poll in October, and 55 prominent economists participated. Of these 55, 26 predicted a contraction of 10% or more the previous year.
“34 out of 39 economists, about 90%, who responded to an additional question added that the aforementioned government stimulus was not enough to boost the economy. It would take the Indian GDP at least a year to reach the pre-pandemic levels,” said the survey (6).
While talking about how the scheme would affect India’s economy, Rahul Bajoria, chief India economist at Barclays (7), an investment bank and fiscal service company, told the media that the government could balance the extra cost with the extra GST it would collect from the transitions which start from the household.
“Circular spending makes the consumer spending drive financially neutral. As the spending limit on consumer durables can be up 3x the earlier tax concession, we don’t believe the scheme would have any material financial cost, as the extra GST collected would offset the extra cost that may incur on the government’s balance sheet.”
Notably, the government had also announced a 10k INR one-time special festival bonus for government employees. However, Bajoria believes that it was “unlikely to be a financial cost” and more likely a “cash flow issue,” which would not have any material impact on financial sustainability.
Another report from Yahoo Finance is also worth mentioning here, which stated (8), “High government borrowing from the market can increase interest rates and deny credit to the private sectors, which would reduce their money pool availability, termed as crowding out. The monetization of the fiscal deficit can avert this situation. However, there are risks of high inflation and currency depreciation apart from a generation deterioration of macroeconomic balance.”
There are also economists advising RBI not to print money to combat the fiscal deficit. According to them, if there is no major COVID third-wave, India will see a rapid economic recovery.
The Counter Argument
According to an eminent economist, Pinaki Chakraborty, the RBI should not print money as it can lead to financial profligacy. According to the director of NIPFP, National Institute of Public Finance and Policy, high inflation is a concern, and the government needs to stabilize the inflation.
“I believe the debate started at the beginning of the pandemic, and printing more money was not considered. I do not think the RBI should do it. We stopped it in 1996 via an MOU, memorandum of understanding between the government, and we should no go back to it again,”
said Chakraborty (9).
Chakraborty also added that India might see a rapid economic revival if there is no third major wave of coronavirus. The statements came amid the recent calls from several quarters to print more money. Chakraborty highlighted that the country’s macroeconomic scenario is comparatively better than during the first wave.
In response to a query on cash bailouts for the people who lost their jobs, Chakraborty stated that the employment cycle couldn’t be insulated from an economic shrinkage. He added that support offered via fiscal measures could only offer livelihood security to some extent in the short run. “Faster economic recovery is what we need to enhance employment.”
Chakraborty also stated that it is necessary to understand the stimulus’ sectoral nature instead of seeing whether it was provided via the budget or any means while responding to the query on the government’s stimulus measures and their impact. He pointed out that the sole aim of the stimulus is economic revival. And as far as the budgetary stimulus is concerned, there has been a surge in the financial deficit to the extent of 9.5% of the GDP in the last fiscal.
Chakraborty highlighted that if the fiscal deficit of the states is considered, it will stand about 4.5% of their GDPs, cumulatively, 14 to 15% of the GDP. “We are talking about a 90% debt to GDP ratio; the financial headroom for increasing expenditure is limited.”
It is not the quantum of the financial stimulus alone; we also have to look at the government’s aggregate stimulus and its design to navigate the crisis.
Notably, Finance Minister Nirmala Sitharaman had announced 1.5 lakh crore additional credit for MSME, more funds for the healthcare industry, loans to tourism agencies, and waiver of visa fees for foreign tourists to revive the pandemic-hit economy. Sitharaman had announced these measures in the backdrop of states lifting lockdowns due to the decline in new COVID cases. The Indian economy also appears to be on the recovery path after the world’s worst COVID, the second wave of infections, hit India (10).
The government had also announced the Atma Nirbhar Bharat package in 2020 for economic revival, estimated to be about 27.1 lakh crore INR. It amounts to over 13% of the GDP and also included liquidity measures of the RBI (11).
Chakraborty also highlighted that inflation has reached a challenging level and needs to be handled in the upcoming months. He said that the economic contraction, recession, and rise in inflation could have adverse distributional consequences. The reduction of taxes on fuel would also mean a huge increase in the government’s deficit, said Chakraborty while responding to a query on reducing taxes on petroleum following the recent hardening of crude oil price.
“Fiscal management, inflation management, and macro-management is a complex issue. To say it to reduce it because the prices have increased would mean that you would borrow more to finance your deficit.”
The RBI’ July Economic Report
It is worth highlighting that India’s economy had contracted by 7.3% in FY 2020-21 as it strained the first wave of the coronavirus compared to 4% growth in FY 2019-20. And while India’s economy may appear to be growing, the overall market demand is still low (12).
On 15th July, Thursday, RBI stated that an aggressive vaccine push had improved the near-term prospects for the Indian economy and GDP on its July bulletin (13). However, the central bond also warned that a solid surge in aggregate demand has not taken shape yet. And there will be a substantial slack in the economy, and demand pressures may take some more time to be evident.
The RBI said an increase in inflation was mainly driven by adverse supply stocks and sector-specific demand and supply mismatches because of the pandemic. It added that inflation increased to over 6% in May and June this year, and it will persist for some more months before easing in the third quarter of the current FY.
The report also talked about the global bond market volatility. And it states that the weak economy will not withstand liquidity and rate tightening in its present state, and the fragile recovery could be at risk.
Last month, Shaktikanta Das, the RBI governor, stated, “no plan to print more currencies.”
While answering a query from The Hindu (14), Das stated, “with regards to currency printing, central banks have their own models and assessments. The central bank makes decisions regarding the printing of currencies based on several complex factors relating to fiscal stability, inflation, and exchange rates stability.”
“At present, the borrowing needs of both the center and states had been handled successfully last year.”
How is the United States Doing It?
Last year, the US Federal Reserve printed money virtually and injected it into the commercial banking system, similar to an electronic deposit (15).
It means that the Fed had initiated huge purchases on the open market by adding newly printed electronic currencies to banks’ reserves.
In exchange, the Fed is received a huge amount of bonds, backed by bundles of home mortgages.
As per Oxford Economics, the Fed had bought about 3.5 trillion government securities with these newly created virtual dollars by the end of the year.
The move has made getting credit easier, with a big-money supply and low-interest rates.
In a recent news conference, Jerome Powell, Chairman of Federal Reserve, said that these purchases have helped market conditions improve “substantially” in recent weeks (16). Notably, the US had also done it back in 2008.
What About Other Countries?
About three months ago, the United Kingdom voted for money printing with the Bank of England offering a direct monetization facility to the UK government despite the Bank of England’s governor’s objections.
Japan is purchasing an unlimited number of government bonds, and Europe has removed its limit on the bonds it can purchase from any single Eurozone nation (17).
Should India Print More Money Like the US or Europe?
In simple words: India could have printed more money in the pandemic’s initial month but not now.
And notably, India did increase its currency in circulation by a record 5 lakh crore INR and went up to 27,70,315 crore INR, up 22% compared to 2021. It was the sharpest increase to date for India if we exclude the post-pandemic demonetization surge. And, as the experts pointed out, it was not enough to boost the economy (18, 19).
However, printing more money is not a viable option as of now for India. Why? If a country prints money, people will have more to spend to purchase the same amount of products. However, in reality, people would want to purchase more products.
For instance, suppose India has ten apples, and all Indians have 10 INR. They can purchase an apple for a rupee; however, if India prints more money, ten more rupees, for say, Indians will have to pay 2 INR for the same apple.
India could have printed more money during the initial months of the pandemic because, at that time, India had more than enough stock of grains and basic amenities. And since there was enough stock, the prices wouldn’t have increased too much. However, it is too late now.
Let’s refer to history to see what happened to counties that printed excessive money.
In the past, when countries attempted to get richer by printing more cash, it did not work. Printing more cash, as we discussed, creates excess cash supply in the economy. Now, everyone has more money, which means people try to purchase more products. It pushes the costs up as sellers try to exploit the situation and charge exorbitant prices.
It has happened before in Venezuela and Zimbabwe, and they experienced massive inflation. In Zimbabwe, the costs increased as much as 231,000,000% in a single year back in 2008.
So back to our main question, should India print more money like the US or Europe?
Again, the short answer is no.
Why? Because considering how Indians generally tend to avoid paying taxes and the fact that India’s informal economy makes a large part of its overall economy, the government can not print money and spend it in the same way as the US, Europe, or the governments of any other developed economies can.
It is because the United States and other developed countries have stricter tax regulations under which people do pay taxes, unlike India. Hence, before India can start similarly printing money, it will have to reduce tax evasion and formalize the informal sector.
It has nothing to do with a country’s currency stability in the international market as it is more of an internal issue.
The Indian government can’t implement a solution overnight. It calls for policy reforms, cleaning up the entire fiscal system, apt economic reforms, and much more. All of it can encourage entrepreneurship and startups in the country, which can also create demand for the Indian rupee. More important of all, it also needs immense political will (20).
To sum up, should India print more money? Well, it is not an easy decision that the government can take overnight or even in a matter of days. It is more complicated than that. One needs to weigh numerous pros and cons before making such a decision.
Moreover, at this point, it is not an economical but more of a political decision.