Coronavirus – Economic Issues

Is printing money an option to tide over the crises

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Monetisation of debt

Mains level : Paper 3-Option to find revenue to deal with the crises.

India has been dealing with unprecedented crises-with China on border and with economy and pandemic within. Fighting these crises require resources. So, this article examines the options to raise revenue and the consequences that come with them.

Increase in financial burden to counter China

  •  The Chinese military threat calls for immediate and strategic action by our defence and foreign affairs establishments.
  • India’s war against Pakistan in Kargil in May 1999 provides hints of the financial burden of a military threat.
  • India’s defence expenditure in the war year shot up by nearly 20% from the previous year.
  •  India’s defence budget for the next financial year was 2.7% of nominal GDP, the highest in decades.
  • China is a far mightier power than Pakistan.
  • India’s defence budget has been whittled down to just 2% of GDP for the financial year 2021.
  • China’s defence budget is nearly four times larger.
  • In all likelihood, the Chinese conflict will stretch central government finances by an additional one to two percentage points of GDP.

Economics of healthcare

  •  The combined public health expenditure of States and the central government in India is a mere 1.5% of GDP.
  • While China’s is at 3% and America’s at 9%.
  • The COVID-19 epidemic is expected to linger on for another two years.
  • There is no option other than to significantly ramp up India’s health expenditure.
  • So, government will need additional funds of the equivalent of at least one percentage point of GDP to continue the fight against COVID-19.

But economy is in bad shape

  • India’s economy has four major drivers: 1) Spending on consumption. 2) Government spending. 3) Investment. 4) external trade.
  • Spending by people is the largest contributor to India’s economic growth every year.
  • For every ₹100 in incremental GDP, ₹60 to ₹70 comes from people’s consumption spending.
  • The lockdown shut off people from spending for two full months.
  • India’s economy will contract for the first time in nearly five decades.
  • With the global economy in tatters, trade is not a viable alternative to offset the loss from consumption.
  • Investment is also not a viable option at this stage since the demand for goods and services has fallen dramatically.

So, what we want is new “New Deal”

  • There are only two options to come out of this situation.
  • 1) Either put money in the hands of the needy to stimulate immediate consumption.
  • 2) Or, the government has to embark on a massive spending spree, akin to the “New Deal”.
  • New Deal was a series of programmes and projects instituted in the U.S. during the Great Depression of the 1930s.
  • Government will need to inject incremental funds of five percentage points of GDP to absorb the economic shock and kick start the spending cycle again.

Findind resources while aoiding “junk rating”

  • Additional expenditure on health, defence and stimulus package plus making up for a shortfall in revenue will lead to a fiscal deficit of 10% of GDP.
  • The only option for the government to finance its needs is to borrow copiously.
  • Borrowing will obviously push up debt to ominous levels.
  • When government debt rises dramatically, it gives rise to a “junk” crisis.
  • With rising debt levels, international rating agencies will likely downgrade India’s investment rating to “junk”.
  • Junk rating will then trigger panic among foreign investors.
  • India thus faces a tough dilemma — save the country’s borders, citizens and economy or prevent a “junk” rating.

Is printing money an option?

  • Economic theory states that if money is printed at will, it can lead to a massive spike in prices and inflation.
  • This theory has fallen flat in the past decade in developed nations such as America.
  • The U.S dollar, by virtue of being the world’s reserve currency, has in-built protection against a currency crisis that can be triggered by at-will printing of money.
  • India don’t have that protection.
  • Hence, the Reserve Bank of India can just create money at will and transfer them to government coffers electronically, some argue.
  • Whether money is printed or borrowed from others, it will still be counted as government debt.
  • And so, cannot escape a potential downgrade to a “junk” rating.

Consider the question “As the government has been dealing with the unprecedented crises, it has to explore the option of monetisation of its debt. Examine the issues with such a move.”

Conclusion

How India emerges from this crisis will shape not just India’s destiny but the world’s. The best course of action is to borrow unabashedly to pull India out of the crisis and deal with the consequences of a potential “junk” nation label.

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