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Subject: Economics

  • Understanding the monetisation of deficit

    The RBI could finance the government debt by buying bonds from the secondary market. Or it could directly finance the debt. And both could stoke inflation. But, do they carry the same inflation risk. The answer is an unambiguous ‘No’. So, how monetisation of debt is different from Open Market Operation by the RBI? Read the article to know…

    What is Monetised deficit?

    • The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme.
    • In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.

    What monetisation of deficit mean (and doesn’t mean)

    • Monetisation of the deficit does not mean the government is getting free money from the RBI.
    • If one works through the combined balance sheet of the government and the RBI, it will turn out that the government does not get a free lunch.
    • But it does get a heavily subsidised lunch.
    • That subsidy is forced out of the banks.
    • And, as in the case of all invisible subsidies, they don’t even know.

    So, is the RBI monetising the debt?

    • It is not as if the RBI is not monetising the deficit now; it is doing so.
    • It is doing so indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
    • Note that both monetisation and OMOs involve printing of money by the RBI.
    • But there are important differences between the two options that make shifting over to monetisation a non-trivial decision.

    Historical context of the monetisation of debt: An agreement

    • In the pre-reform era, the RBI used to directly monetise the government’s deficit almost automatically.
    • That practice ended in 1997 with a landmark agreement between the government and the RBI.
    • It was agreed that henceforth, the RBI would operate only in the secondary market through the OMO route.
    • The implied understanding also was that the RBI would use the OMO route not so much to support government borrowing.
    • So, the RBI uses OMO as liquidity instrument to manage the balance between the policy objectives of supporting growth, checking inflation and preserving financial stability.

    So, what were the outcomes of the agreement?

    • The outcomes of that agreement were historic.
    • Since the government started borrowing in the open market, interest rates went up.
    • HIgh interest rates incentivised saving and thereby spurred investment and growth.
    • Also, the interest rate that the government commanded in the open market acted as a critical market signal of fiscal sustainability.
    • Importantly, the agreement shifted control over money supply, and hence over inflation, from the government’s fiscal policy to the RBI’s monetary policy.
    • The India growth story that unfolded in the years before the global financial crisis in 2008 when the economy clocked growth rates in the range of 9 per cent was at least in part a consequence of the high savings rate and low inflation which in turn were a consequence of this agreement.

    What is the reasoning for jeopardising the hard-won gains of agreement?

    • The Fiscal Responsibility and Budget Management Act as amended in 2017 contains an escape clause.
    • Escape clause permits monetisation of the deficit under special circumstances.
    • What is the case for invoking this escape clause?
    • The case is made on the grounds that there just aren’t enough savings in the economy to finance government borrowing of such a large size.
    • Bond yields would spike so high that financial stability will be threatened.
    • The RBI must therefore step in and finance the government directly to prevent this from happening.

    No, the situation is not so grim-Look at the bond yields

    • There is no reason to believe that we are anywhere close to the above-mentioned situation.
    • Through its OMOs, the RBI has injected such an extraordinary amount of systemic liquidity that bond yields are still relatively soft.
    • In fact the yield on the benchmark 10 year bond which was ruling at 8 per cent in September last year has since dropped to just around 6 per cent.
    • Even on the day the government announced its additional borrowing to the extent of 2.1 per cent of GDP, the yield settled at 6.17 per cent.
    • That should, if anything, be evidence that the market feels quite comfortable about financing the enhanced government borrowing.

    Why worry about monetisation if OMO also leads to inflation?

    The following four issues make clear the difference in OMO and monetisation

    1. Issue of RBI’s control over monetary policy

    • Both monetisation and OMOs involve expansion of money supply which can potentially stoke inflation.
    • If so, why should we be so wary of monetisation?
    • Because although they are both potentially inflationary, the inflation risk they carry is different.
    • OMOs are a monetary policy tool with the RBI in the driver’s seat, deciding on how much liquidity to inject and when.
    • In contrast, monetisation is, and is seen, as a way of financing the fiscal deficit with the quantum and timing of money supply determined by the government’s borrowing rather than the RBI’s monetary policy.
    • If RBI is seen as losing control over monetary policy, it will raise concerns about inflation.
    • That can be a more serious problem than it seems.

    2. Credibility of RBI on curbing inflation

    • India is inflation prone.
    • Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation.
    • In hindsight, it is clear that the RBI failed to tighten policy in good time.
    • Since then we have embraced a monetary policy framework and the RBI has earned credibility for delivering on inflation within the target.
    • Forsaking that credibility can be costly.

    3. Yield on bond could shoot up anyway

    • If, in spite of above problems, the government decides to cross the line, markets will fear that the constraints on fiscal policy are being abandoned.
    • Perception in the market will be that the government is planning to solve its fiscal problems by inflating away its debt.
    • If that occurs, yields on government bonds will shoot up, the opposite of what is sought to be achieved.

    4. Monetisation is not inevitable yet

    • What is the problem that monetisation is trying to solve?
    • There are cases when monetisation — despite its costs — is inevitable.
    • If the government cannot finance its deficit at reasonable rates, then it really doesn’t have much choice.
    • But right now, it is able to borrow at around the same rate as inflation, implying a real rate (at current inflation) of 0 per cent.
    • If in fact bond yields shoot up in real terms, there might be a case for monetisation, strictly as a one-time measure.
    • We are not there yet.

    Consider the question asked in 2019, “Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your argument.”

    Conclusion

    Though OMO and monetisation both leads to inflation, the issues with monetisation have far-reaching consequences. Also, the situation we are in doesn’t yet warrant monetisation which should be seen as a last resort.

    Back2Basics:  Open Market operation

    • OMOs are conducted by the RBI by way of sale and purchase of G-Secs to and from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
    • When the RBI feels that there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity.
    • Similarly, when the liquidity conditions are tight, RBI may buy securities from the market, thereby releasing liquidity into the market.

     

     

  • Alleviating the farmers’ pain

    The article discusses the recently announced reforms in the agri-marketing. The legal changes promised are expected to deal with problems farmer face in selling their products and a law dealing with contract farming. These legal reforms are expected to increase farmers’ income.

    Some of the issues faced by the farmers

    • If any class of economic agents of our country has been denied the constitutional right of freedom of trade, it is farmers.
    • They don’t have the freedom of selling their produce even in their neighbourhood.
    • Remunerative price is still a mirage for them.
    • Their farm incomes are at the mercy of markets, middlemen and money lenders.
    • For every rupee that a farmer makes, others in the supply chain get much more.
    • Both farmers and consumers are the sufferers of the exploitative procurement and marketing of farm produce.
    • The public investments in irrigation and other infrastructure has increased.
    • The institutional credit and minimum support price given over the years has been increasing.
    • Yet, farmers are shackled when it comes to selling their produce.

    Restriction on the farmers: Echoes from the past

    • This exploitation of farmers has its roots in the Bengal famine of 1943, World War II, and the droughts and food shortages of the 1960s.
    • The Essential Commodities Act, 1955, and the Agricultural Produce Market Committee (APMC) Acts of the States are the principle sources of violation of the rights of farmers to sell their produce at a price of their choice.
    • These two laws severely restrict the options of farmers to sell their produce.
    • Farmers continue to be the victims of a buyers’ market.
    • This is the principal cause of their exploitation.
    • Renowned farm scientist M.S. Swaminathan has for long argued for the right of farmers to sell their produce as they deem fit.

    Balancing the interest of consumers and the farmers

    • Given the economic disparities in the country, the interests of consumers need to be protected.
    • But that should not happen at the cost of the producers of the very commodities that the consumers need.
    • For various reasons, a balance in this regard could not be struck.
    • The restrictive trade and marketing policies being practised with respect to agricultural prices have substantially eroded the incomes of farmers.

    Let’s have a look at a study on agricultural policies in India

    • A study on agricultural policies in India by the Indian Council for Research on International Economic Relations-Organisation for Economic Co-operation and Development (2018), co-authored by the renowned farm economist Ashok Gulati, was published with startling revelations.
    • It concluded that the restrictions on agricultural marketing amounted to ‘implicit taxation’ on farmers to the tune of ₹45 lakh crore from 2000-01 to 2016-17.
    • This comes to ₹2.56 lakh crore per year.
    • No other country does this.

    Reforms to remove the hurdles in farmer getting remunerative price

    • Recently announced package has approximately ₹4 lakh crore support for farming and allied sectors, aimed at improving infrastructure and enhancing credit support.
    • But the most welcome feature of this package is the firm commitment to rewriting the Essential Commodities Act and the APMC laws.
    • The revision of these restrictive laws is long overdue and will remove the hurdles that farmers face in getting a remunerative price for their produce by giving them more options to sell.
    • This long-awaited revision needs to be undertaken with care and responsibility so that no space or scope is left for farmers to be exploited yet again.
    • While allowing several buyers to directly access the produce from the farmers, a strong and effective network of Farm Producers’ Organisations should be created to enhance the bargaining power of farmers.
    • This will ensure that individual farmers are not exploited.
    • An effective law on contract farming is also the need of the hour.
    • Law on contract farming will secure incomes of farmers besides enabling private investments.
    • Yet another unique feature of this package has been its comprehensiveness towards improving the incomes of farmers through a range of activities.
    • A study by the National Institute of Agricultural Extension Management has revealed that of the 3,500 farmers’ suicides examined, there was no farmer who had supplementary incomes from dairy or poultry.
    • The huge support to animal husbandry and fisheries in the stimulus package underlines the need for diversifying the income sources of farmers.

    Consider the question “The APMC Acts of the has been blamed for poor price realisation by the farmers. Recently announced reforms promise to do away with such issues in the APMC Act. In light of this, examine the issues with APMC Acts and how the promised reforms are expected to resolve such issues.”

    Conclusion

    It is time to allow our farmers to sell their produce anywhere for their benefit. All stakeholders should be taken on board while revising restrictive agri-marketing laws.

  • How effective is the stimulus package to revive the supply chains?

    Disruption of the supply chains lies at the heart of the decline in the output amid lockdown. And the government has announced the fiscal stimulus to revive the economy. How effective will be the fiscal stimulus to streamline the supply chains? The focus of this article is on tackling this question.

    Disruption in supply chains and decline in output

    • Much of the decline in output is due to supply chain disruptions generated by the lockdown.
    • Government spending can do little to alleviate this.
    • Putting money in the hands of people can increase the demand for goods but cannot increase the supply of goods and services.
    • In modern economies, the production of goods happens through complex supply chains that traverse geographical boundaries.

    Let’s understand how supply chains work

    •  Upstream sectors like ‘mining’ produce metals that are in turn used to produce machines.
    • These machines are used to sow seeds, harvest crops, and transport fuel.
    • Finally, the harvested crops are used by downstream sectors to produce flour and bread.
    • At each step, machines and labour combine to produce goods which are the inputs for sectors further downstream.

    So, how lockdown affected the supply chains?

    • Under the lockdown, numerous inputs have not moved from their producers to their users.
    • These disruptions may not at first generate a reduction in consumer goods like bread.
    • However, the availability of consumer goods will begin to decline as bakers run out of flour, and mills exhaust their stocks of wheat.
    • And there is no way to guarantee the flow of essential goods while suspending the production of non-essential goods.
    • Automotive spare parts may be non-essential in the short run, but become essential as food-carrying trucks begin to break down.(i.e. in the long run)
    • How far is the long run? This is difficult to say; there may be some variation across goods.

    Impact of labour shortage on supply chains

    • The supply chain disruptions are going to be amplified by labour shortage as workers remain at home.
    • Countries like India are likely to experience a greater reduction in output on this count than, say, Europe or the U.S.
    • This is because of the higher labour intensity of production in India.
    • To understand this, think of the difference in unloading of goods in the port at Rotterdam and the port at Kochi.
    • Is it viable to substitute labour with capital? Poorer countries are less likely to be able to substitute locked down labour with capital because of the dearth of capital in these nations.

    Adapting and Adjusting to the new reality

    • As economies emerge out of the lockdown, entrepreneurs, workers, and consumers must adjust to the new reality.
    • The world supply chain must adapt.
    • Firms may choose to source inputs from suppliers in their geographical proximity to minimise the risk of future disruptions.
    • But this involves building productive capacity at new locations, all of which requires investments fuelled by savings.
    • Furthermore, the investments must be guided by price signals.
    • Within a market economy, the movement of prices provides the incentive and information needed to adapt and grow.
    • As economist Ronald Coase put it, prices are bundles of information wrapped in an incentive.
    • As the prices of some inputs rise, the buyers of these inputs look for alternate suppliers, and firms which did not hitherto produce the good have an incentive to do so.
    • The key to economic recovery lies in millions of such adjustments.
    • Through such adjustments, firms locate new providers of inputs, new buyers of their output, and build factories at new locations.

    How fiscal stimulus would disrupt the recovery of supply chains?

    • Market adjustment processes are likely to be disrupted by government stimulus packages.
    • Governments spend by printing money, raising debt, or increasing taxes.
    • Irrespective of the way in which the expenditure in funded, resources are transferred from private entrepreneurs to government bureaucrats.
    • When governments print money, they draw resources through inflation.
    • Bureaucrats tend to be less efficient than profit-motivated firms in allocating scarce resources.
    • Bureaucrats have little incentive or information to bring about the granular supply chain adjustments necessary to revive growth.
    • As the stimulus package kicks in, economic efficiency is likely to decline and so are the chances of a timely recovery of output.

    A lesson from West Germany after WW II

    • The experience of West Germany after World War II has a useful lesson for India.
    • Beginning mid-1944, Allied bombing disrupted the German supply chain by targeting bottleneck sectors like electric power generation.
    • This destruction of the supply chain devastated the German economy.
    • Per person food production fell to about half of its pre-war level.
    • Two years later, this changed after Chancellor Ludwig Erhard lifted price controls and cut taxes.
    • West German entrepreneurs re-established a thriving supply chain through which goods went from upstream sectors to final consumers.
    • By 1950, per capita income in West Germany had reached its pre-war level.

    Consider the question “Supply chain disruption has been at the core of economic consequences of the corona pandemic. New adjustment in the supply chains would be the norm in the aftermath of the pandemic. What these readjustments would entail? Suggest the measures to help the supply chains recover.”

    Conclusion

    The recent supply chain disruptions are likely to last long. The path to recovery lies in cutting government expenditure, removing price controls, and opening up trade.

  • Applying the lessons learned from GST to One Nation One Ration Card (ON-ORC)

    Never before we felt the necessity of portable benefit schemes as we did in the wake of the pandemic. Portable ration card could have mitigated the suffering of migrant workers to some extent. But it was not to be. This article examines the challenges in implementing the idea of ON-ORC and offers the solution to these challenges by drawing on the lessons learned from GST. At the same time, the shortcoming of GST can also be avoided in the ON-ORC.

    What is One Ration Card (ON-ORC)?

    • In the present system, a ration cardholder can buy foodgrains only from an Fair   Price Shop that has been assigned to her in the locality in which she lives.
    • However, this will change once the ONORC system becomes operational nationally.
    • Under the ONORC system, the beneficiary will be able to buy subsidised foodgrains from any FPS across the country.
    • The new system, based on a technological solution, will identify a beneficiary through biometric authentication on electronic Point of Sale (ePoS) devices installed at the FPSs.
    • This would enable that person to purchase the number of foodgrains to which she is entitled under the NFSA.

    Portable welfare benefit and attempts so far to achieve it

    •  The idea of portable welfare benefits means a citizen should be able to access welfare benefits irrespective of where she is in the country.
    • In the case of food rations, the idea was first mooted under the UPA government by a Nandan Nilekani-led task force in 2011.
    • The current government had committed to a national rollout of One Nation, One Ration Card (ON-ORC) by June 2020, and had initiated pilots in 12 states.

    Progress on intra-state and inter-state portability

    • While intra-state portability of benefits has seen good initial uptake, inter-state portability has lagged.
    • The finance minister has now announced the deadline of March 2021 to roll out ON-ORC.

    So, to ensure a smooth rollout, let’s review the challenges thus far

    1) The fiscal implications:

    • ON-ORC will affect how the financial burden is shared between states.

    2) The larger issues of federalism and inter-state coordination:

    • Many states are not convinced about a “one size fits all” regime because i) they have customised the PDS through higher subsidies, ii) higher entitlement limits, and iii) supply of additional items.

    3) The technology aspect:

    • ON-ORC requires a complex technology backbone that brings over 750 million beneficiaries, 5,33,000 ration shops and 54 million tonnes of food-grain annually on a single platform.

    How the lessons learned from GST can be applied to deal with the above 3 challenges?

    1. Fiscal challenge

    • Just like with ON-ORC, fiscal concerns had troubled GST from the start.
    • States like Tamil Nadu and Gujarat that are “net exporters” were concerned they would lose out on tax revenues to “net consumer” states like UP and Bihar.
    • Finally, the Centre had to step in and provide guaranteed compensation for lost tax revenues for the first five years.
    • The Centre could provide a similar assurance to “net inbound migration” states such as Maharashtra and Kerala that any additional costs on account of migrants will be covered by it for the five years.

    2. We could have a National council for ON-ORC

    • GST also saw similar challenges with broader issues of inter-state coordination.
    • In a noteworthy example of cooperative federalism, the central government created a GST council consisting of the finance ministers of the central and state governments to address these issues.
    • The government could consider a similar national council for ON-ORC.
    • To be effective, this council should meet regularly, have specific decision-making authority, and should operate in a problem-solving mode based on consensus building.

    3. Technological aspect: PDS Network

    • GST is supported by a sophisticated tech backbone, housed by the GST Network (GSTN), an entity jointly owned by the Centre and states.
    • A similar system would be needed for ON-ORC.
    • The Nilekani-led task force recommended setting up of a PDS network (PDSN).
    • PDSN would track the movement of rations, register beneficiaries, issue ration cards, handle grievances and generate analytics.
    • Since food rations are a crucial lifeline for millions, such a platform should incorporate principles such as inclusion, privacy, security, transparency, and accountability.
    • The IM-PDS portal provides a good starting point.

    Also, there are certain shortcomings in GST which we could avoid in ON-ORC

    We should learn from the shortcomings and challenges of the GST rollout. For example:

    1) Delay in GST refunds led to cash-flow issues.

    • Similar delays in receiving food rations could be catastrophic.
    • Therefore, ON-ORC should create, publish and adhere to time-bound processes.
    • The time-bound processes could be in the form of right to public services legislation that have been adopted by 15 states, and rapid grievance redress mechanisms.

    2)  Increase in compliance burden for MSMEs, especially for those who had to digitise overnight.

    • Similar challenges could arise in ON-ORC.
    • PDS dealers will need to be brought on board, and not assumed to be compliant.
    • Citizens will need to be shielded from the inevitable teething issues by keeping the system lenient at first.
    • This can be done by providing different ways of authenticating oneself and publicising a helpline widely.

    Consider the question “One Nation-One Ration Card(ON-ORC) could solve many problems faced by the beneficiaries when they move across the country. Examine the challenges the ON-ORC could face. Suggest ways to deal with these challenges.”

    Conclusion

    If done well, ON-ORC could lay the foundation of a truly national and portable benefits system that includes other welfare programmes like LPG subsidy and social pensions. It is an opportunity to provide a reliable social protection backbone to migrants, who are the backbone of our economy.

  • Char Dham Project

    The Chamba Tunnel constructed by the Border Roads Organisation (BRO) under Chardham Project was recently inaugurated.

    Make a note of all projects and circuits under Swadesh Darshan and PRASHAD Scheme.

    What is the Char Dham Project?

    • The Char Dham project consists of widening and repairing 889-kilometres of national highways leading to revered shrines of Kedarnath, Badrinath, Gangotri and Yamunotri.
    • It is a proposed two-lane expresses National Highway with a minimum width of 10 metres in the state of Uttarakhand.
    • The project includes 900 km national highways will connect whole of Uttarakhand state.

    Chamba Tunnel

    • The Chamba tunnel is 440 m long and is a Horseshoe type tunnel with 10-metre carriageway width and 5.5m vertical clearance.
    • The BRO achieved this major milestone by digging up a 440 m long Tunnel below the busy Chamba town on Rishikesh-Dharasu road Highway (NH 94).

    Back2Basics: Border Roads Organisation (BRO)

    • The BRO develops and maintains road networks in India’s border areas and friendly neighbouring countries and functions under the Ministry of Defence.
    • It is entrusted for construction of Roads, Bridges, Tunnels, Causeways, Helipads and Airfields along the borders.
    • Officers from the Border Roads Engineering Service (BRES) and personnel from the General Reserve Engineer Force (GREF) form the parent cadre of the Border Roads Organisation.
    • It is also staffed by officers and troops drawn from the Indian Army’s Corps of Engineers on extra regimental employment.
    • The BRO operates and maintains over 32,885 kilometres of roads and about 12,200 meters of permanent bridges in the country.

  • The perils of the liquidity push

    Whether to focus on demand side or supply side is the dilemma policymakers dealing with the financial crises have always faced. If we look closely, the focus of the package announced by the government is on the supply side and pushing liquidity in the economy. This article examines the various measure announced in the package and elaborated why such measures are likely to fail.

    Focus on credit and liquidity in the package

    • The government has relied heavily on measures aimed at pushing credit to banks, non-banking financial companies (NBFCs) and businesses big and small.
    • These are expected to use borrowed funds to lend to others, make payments falling due, compensate employees even while under lockdown, and otherwise spend even while not earning.
    • The thrust is to get the Reserve Bank of India (RBI) and other public financial institutions to infuse liquidity and increase lending by the financial system.
    • RBI offered the financial institution capital for longer periods at a repo or policy interest rate that has been cut by more than a percentage point to 4%.

    Let’s understand liquidity and its role in crisis

    • The Prime Minister in his speech calling for a “self-reliant India” identified, besides land, labour and laws, “liquidity” as among the areas of focus of the package.
    • What is liquidity: In economic and business parlance, liquidity refers to ease of access to cash.
    • A liquid asset is one that can be easily sold for or replaced with cash.
    • And a liquid firm or agent is a holder of cash, a line providing access to cash, or assets that can be easily and quickly converted to cash without significant loss of value.
    • In periods of crisis, individuals, small businesses, firms, financial institutions and even governments tend to experience a liquidity crunch.
    • Relaxing that crunch is a focus of the government’s crisis-response package.
    • So, the government has given a much larger role to enhancing liquidity than it does either to direct transfers.

    So, let’s look at steps taken by the government to ensure liquidity

    1. LTRO and issues with it

    • Among the first steps taken by the RBI was the launch of special and ‘targeted’ long term repo operations (TLTROs).
    • LTROs allowed banks to access liquidity at the repo rate to lend to specified clients.
    • One round of such operations, which was relatively more successful, called for investment of the cheaper capital in higher quality investment grade corporate bonds, commercial paper, and non-convertible debentures.
    • What went wrong? That funding allowed big business, varying from Reliance and L&T to financial major HDFC, to access cheap capital to substitute for past high-cost debt or finance ongoing projects.
    • There is little evidence that this is triggering new investment decisions.

    2. Focus on saving NBFCs and why it failed to give the desired result?

    • The second round was geared to saving NBFCs, whose balance sheets were under severe stress even before the COVID-19 strike.
    • NBFCs were finding it difficult to roll over the short-term debt they had incurred to finance longer-term projects.
    • Banks were wary about lending to these NBFCs.
    • Banks feared that their clients could default in amounts that would bring the viability of these institutions into question.
    • Those fears were confirmed when Franklin Templeton announced that it was shutting down six of its funds.
    • Franklin Templeton set off redemption requests across the NBFC sector, as investors rushed to take back their money.
    • This happened at a  time when the ability of these institutions to mobilise funds to meet these demands had been impaired.
    • Not surprisingly, banks were unwilling to respond when liquidity was infused to target lending to the NBFCs.

    3. More intermediaries and credit guarantee by the government

    • Building on these initial liquidity infusion efforts, the COVID-19 package identified more intermediaries.
    • These intermediaries include the Small Industries Development Bank of India, the National Bank for Agriculture and Rural Development, and the National Housing Bank.
    • The intermediaries were expected to refinance lending by the banks to different sections.
    • To persuade the banks and other intermediaries to take up these offers when the clients they must lend to MSME, street vendors, marginal farmers, etc. are themselves stressed, in some instances the government offered them partial or full credit guarantees in case their clients defaulted.
    • The government also sought to persuade the RBI to lend directly to NBFCs against their paper.

    Why the above 3 measure won’t succeed?

    • These measures, which are only marginally effective even in the best of times, will not work during this crisis.
    • Consider a bank or NBFC lending to small business.
    • With economic activity either at a complete stop or at a fraction of the normal, those who can access credit would either not borrow or only do so to protect themselves and not use the funds either to pay their workers or buy and stock inputs.
    • Even after the lockdown is lifted, the compression of demand resulting from the loss of employment and incomes would be considerable.
    • It would be aggravated by the fact that spending by a fiscally conservative government would fall sharply because of a collapse in revenue collections.
    • Faced with sluggish demand, firms are unlikely to meet past and current payments commitments and help the revival effort, just because they have access to credit.
    • This would mean that credit flow would actually not revive.
    • This danger is even greater because the government has been measly with its guarantees.
    • The government doesn’t want to accumulate even contingent liabilities that do not immediately affect the fiscal deficit.

    Increasing the disposable income

    • Another component of the “liquidity” push is the measures that temporarily increase the disposable income of different sections.
    • Such measures include advance access to savings like provident fund contributions, lower tax deduction at source, reduced provident fund contributions and moratoriums on debt service payments for a few months.
    • These measures are expected to provide access to cash inflows and reduce cash outflows, to induce agents to meet overdue payments or just spend to enhance the incomes of others.
    • These are marginal in scope, if relevant at all.
    • They have been combined with non-measures like adding on pending payments such as income tax refunds to spike “liquidity provision”.

    Way forward

    • What is needed now is government support in the form of new and additional transfers to people in cash and kind, and measures such as wage subsidies, equity support and spending on employment programmes.
    • That, as many have acknowledged, would require debt financed spending by the government, with borrowing at low-interest rates from the central bank or a “monetisation” of the deficit.
    • Unfortunately, obsessed as it is with fiscal conservatism and tax forbearance, the government is unwilling to take that route.

    Consider the question “Every stimulus package provokes a debate for its emphasis on either supply-side or the demand side. Examine the provision in the stimulus package announced by the government which focuses on the supply side. What are the issues with supply-side focus in the package?”

    Conclusion

    Overall, the “transmission” of the supply side push from these monetary policy initiatives for relief and revival is bound to be weak. Given the circumstances, the liquidity push, even if partially successful, would only culminate in eventual default, as borrowers use the debt to just stay afloat in the absence of new revenues.

  • Time to evaluate and merge income support schemes

    Both States and Center have income support schemes for the farmers. Coincidentally, they both suffer from common problems such as the exclusion of tiller from the benefit and identifying the landless labourers. This article floats the idea of merging all the support schemes in favour of an umbrella scheme. So, what are the solutions and how will an umbrella scheme be more beneficial? Read to know…

    Not much ‘new cash’ in the relief package

    • On May 12, the PM announced that his government’s relief-cum-stimulus package would be Rs 20 lakh crore, almost 10 per cent of India’s GDP.
    • But when Finance Minister unveiled the package, sector by sector, many wondered where the “new cash” was?
    • So, it became clear that additional relief and stimulus in the system is just about 1 per cent of the GDP — not 10 per cent.
    • Much of the rest is directed towards increasing liquidity and deferring some loan payments, but not much additional cash.

    Cash-transfer schemes by the state governments: Chhatisgarh and other states

    • In this context, the Chhattisgarh government deserves compliments for launching the Rajiv Gandhi Kisan Nyay Yojana (RGKNY).
    • RGKNY is an income transfer scheme at Rs 10,000/acre for paddy farmers and Rs 13,000/acre for sugarcane farmers.
    • The state’s chief minister has said that the scheme will be extended to farmers of other crops — in fact, to landless labourers as well.
    • On the face of it, RGKNY will help put money directly into the hands of farmers and poor agricultural labourers.
    • In kharif 2018-19, Telangana announced a cash transfer scheme of Rs 4,000/acre, per season — this was raised to Rs 5,000/acre per season in kharif 2019-20.
    • There is a live portal that gives the details of the scheme and its progress.
    • In the rabi season of 2018-19, the Odisha government launched the KALIA scheme-Krushak Assistance for Livelihood and Income Augmentation- on a somewhat similar pattern.
    • West Bengal’s Krishak Bandhu and Jharkhand’s Mukhya Mantri Krishi Aashirwad Yojana are the other income support schemes worth mentioning.

    2 Issues with income support policies and solutions

    1. The beneficiary is not always tiller of the land

    • Ideally, the money of the policies should go to the real tiller.
    • But in large parts of the country, there is no record of tenancy.
    • The government data shows only 10 per cent tenancy in the country.
    • While several micro-level studies indicate that it could be anywhere between 25-30 per cent.
    • In fact, in many regions like the Godavari belt, it could be even more than 50 per cent.
    • It does not make much sense to put money into the accounts of absentee landlords.

    So, what is the solution to this problem?

    • 1) The best way would be to change the tenancy laws.
    • Open up land lease markets, ensuring that the owner of the land has full rights to take his land back after the expiry of the lease period.
    • The current law, favouring “land to the tiller”, is loaded against the owner.
    • As a result, much of tenancy in the country remains oral.
    • 2) In the absence of such legal changes in land lease laws, the only way forward is to fully inform the tiller that the owner has got income support.
    • And then appeal to the owner to pass on this benefit to the tiller — or adjust the land rent accordingly.
    • Information and persuasion campaigns in radio and newspapers would increase the chances of the benefits being passed on to the real tillers.

    2. Identifying the landless labourers working on the farms

    • The other issue is identifying the landless labourers working on farms.
    • Majority of them are temporary and seasonal workers.
    • And leaving the task of identification to panchayats and patwaris can open doors for large leakages and corruption.

    What is the solution to this problem?

    • There have been talks in the past for synchronising MGNREGA with farm operations.
    • The synchronising will have two benefits-
    • 1)It will contain the cost of farming.
    • 2) It will ensure that those engaged in this employment guarantee scheme do useful and productive work.
    • The legal framework of the MGNREGA scheme does allow this on farms owned by people of SC/ST communities, and on the lands of marginal farmers.

     Merging Income Support Schemes: The way forward

    • The time has come to think seriously about merging income support schemes.
    • The merger will include the PM KISAN and state-level schemes, with the MGNREGA and price-subsidy schemes — food and fertiliser subsidies given by Centre and power subsidies given by state government.
    • These schemes amount to Rs 5 lakh crore — that’s a good sum of money to start a basic income cover for poor households.
    • Markets could then be left to operate freely.
    • This approach can cover landless labourers, farmers, and poor consumers — these categories overlap.
    • Let there be an expert group to look closely into the functioning of each one of these schemes and create an umbrella scheme to take care of the poor and the needy.

    Consider the question-“Examine the issues with the income support schemes for farmers by the States as well as the Central government. Do you think that an umbrella scheme after merging all the support schemes will be helpful in overcoming such issues?”

    Conclusion

    Though income support schemes by the state government and the Centre are a welcome move, however, when one looks at the issues with these schemes an umbrella scheme after merging all the present schemes will go a long way in solving the problems which almost all these schemes face today.

    Back2Basics: PM- KISAN

    • Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)is a Central Sector Scheme with 100% funding from the Government of India.
    • It is being implemented by the Ministry of Agriculture and Farmer’s Welfare.
    • Under the scheme, the Centre transfers an amount of Rs 6,000 per year, in three equal instalments, directly into the bank accounts of the all landholding farmers irrespective of the size of their land holdings.
    • It intends to supplement the financial needs of the Small and Marginal Farmers (SMFs) in procuring various inputs to ensure proper crop health and appropriate yields, commensurate with the anticipated farm income at the end of each crop cycle.
    • The entire responsibility of identification of beneficiary farmer families rests with the State / UT Governments.

  • Hardly the 1991 moment for agriculture

    Reforms in agri-marketing has been long overdue. So, the government recently announced three reforms in this regard. This article examines the problems of agri-marketing. And it concludes that the said reforms are far from being the silver bullet for these problems. So, why these reforms are not going to be effective? Does demand play any role in the problems agriculture is facing currently? Read to know about these issues.

    Announcement of reforms regarding agricultural marketing

    • The announcement of reforms in agricultural marketing by Finance Minister in May, has been hailed by some as the “1991” moment for agriculture.
    • The three reforms regarding agricultural marketing were the reforms in the 1) Agricultural Produce Marketing Committee (APMC) Act, 2) the Essential Commodities Act, 3) Contract farming.
    • All of these have been in discussion for almost two decades, with the APMC Act having already seen substantial reforms in many States.
    • The first comprehensive model act on APMC was proposed during 2003, and since then, similar efforts to push for more reforms have been proposed in 2007, 2013, and as late as 2017 by the present government.

    So, let’s a look at provisions of APMC Act and issues with it

    What is the main argument against APMC Act?

    • Two main arguments against the APMC Act are-
    • 1) It creates barriers to the entry and exit of traders.
    • 2) Makes the sale and purchase of agricultural produce compulsory for farmers as well as traders.

    Different steps taken by the state governments to address the issues

    • So, as many as 17 State governments have amended the APMC Act to make it more liberal.
    • In fact, the regulations and the functioning of mandis vary a great deal across States.
    • Kerala does not have an APMC Act.
    • Bihar repealed it in 2006.
    • But several others such as Maharashtra, West Bengal, Odisha, Gujarat, and Andhra Pradesh deregulated fruits and vegetables trade, allowed private markets, introduced a unified trading licence and have introduced a single-point levy of market fee.
    • Tamil Nadu has already reformed its APMC with no market fee.
    • Several others such as Jharkhand, Himachal Pradesh, Uttarakhand, Haryana and Rajasthan have undertaken one or more of these reforms.
    • Many States have introduced direct marketing of farm produce, examples being the Uzhavar Sandhai (Tamil Nadu), the Rythu Bazaar (Andhra Pradesh and Telangana), the Raitha Santhe (Karnataka), the Apni Mandi (Punjab) and the Krushak Bazaar – (Odisha).

    So, why the mandis are still blamed for farmers’ problems?

    • Despite the above-stated reforms, APMC mandis continue to be vilified for-1)  all the ills plaguing marketing infrastructure 2) the low prices received by the farmers for their produce.
    • What is the problem? The problem with mandis is not the regulation per se and the structure of mandis but the political interference in the functioning of the markets.
    • These are more obvious in case of large mandis specialising in commercial crops and fruits and vegetables, where production is regionally concentrated.
    • But even with these deficiencies, APMC mandis continue to play an important role in providing access to the market for farmers.

    What the Bihar example teaches us?

    • Bihar repealed the APMC Act in 2006.
    • The general argument in favour of reforms is that 1) it will allow private investment in marketing infrastructure and 2) provide more choices to farmers, leading to better prices received by farmers.
    • But in the case of Bihar,  no investment came in building market infrastructure.
    • The loss of revenue due to the repeal of the APMC also led to deterioration of existing infrastructure in the State.
    • The revenue collected from the APMC earlier was used not only for the modernisation of these market yards but also for the laying of roads and construction of other infrastructure to provide farmers better access to markets.
    • But after the repeal, there have been no takers for these market yards, with no investment in creating private mandis.
    • On the other hand, it has led to proliferation of private unregulated markets which charge a market fee from traders as well as farmers, and without any infrastructure for weighing, sorting, grading and storage.
    • Even in other States where there is deregulation to allow private traders, there is hardly any investment to create market spaces let alone provide other facilities.
    • There is also no evidence that farmers have received better prices in private mandis outside the APMC.
    • While there have been instances of collusion and corruption in the running of the APMC, they continue to provide essential services to farmers.

    Inadequacies of the regulated market

    • As against the recommendation that a regulated market should be available to farmers within a radius of 5 km currently regulated markets is in the radius of 12 km.
    • There are more than 7,000 regulated markets and 20,000 rural markets when the need is at least twice these figures.
    • Most of the existing ones require investment in upgradation of infrastructure.

    Price received is more a function of demand than access to market

    • The argument that the only bottleneck for farmers not receiving remunerative prices is due to the APMC Act is flawed.
    • More than 80% of farmers, most of whom are small and marginal farmers, do not sell their produce in the APMC mandis.
    • For a majority of farmers, prices received are more a function of the demand for agricultural commodities than access to markets.

    So, let’s come to decline in demand for agriculture produce

    • For much of the period during the last two years, terms of trade have moved against agriculture.
    • Agricultural commodity price inflation had been negative for a large part of the last two years.
    • With underlying weakness in demand and obsession with inflation targeting through fiscal and monetary policies, most agricultural commodities have seen a sharp decline in demand and, consequently, prices received by farmers.
    • The argument for choice of markets is only valid as long as there are buyers with purchasing power in the market.
    • No amount of marketing reforms will lead to higher price realisation for farmers if the underlying macroeconomic conditions are unfavourable to agriculture and farmers.

    What is solution to decline in demand?

    • The primary task of the government should have been to increase fiscal spending to revive demand in the economy.
    • This has become even more necessary after the sharp decline in incomes, job losses and decline in demand following the lockdown and expected contraction in economic activity for the year ahead.
    • With international prices also showing declining trend, the urgency is to protect the farmers from the decline in commodity prices.

    Consider the question “Though the APMC Act has often been blamed for the woes of the farmers in price realisation, the act is not the sole reason for price realisation problems faced by the farmers. Critically examine.

    Conclusion

    The announced reforms are less likely to be effective if carried out without consulting the states. And on the demand side, government needs to increase fiscal spending to create demand in the economy. These two steps will go a long way in ensuring higher incomes to farmers.

    Back2Basics: Agriculture Produce Marketing Committee Regulation (APMC) Act.

    • All wholesale markets for agricultural produce in states that have adopted the Agricultural Produce Market Regulation Act (APMRA) are termed as “regulated markets”.
    • With the exception of Kerala, J & K, and Manipur, all other states have enacted the APMC Act.
    • It mandates that the sale/purchase of agricultural commodities notified under it are to be carried out in specified market areas, yards or sub-yards. These markets are required to have the proper infrastructure for the sale of farmers’ produce.
    • Prices in them are to be determined by open auction, conducted in a transparent manner in the presence of an official of the market committee.
    • Market charges for various agencies, such as commissions for commission agents (arhtiyas); statutory charges, such as market fees and taxes; and produce-handling charges, such as for cleaning of produce, and loading and unloading, are clearly defined, and no other deduction can be made from the sale proceeds of farmers.
    • Market charges, costs, and taxes vary across states and commodities.

    Essential Commodities Act 1955

    • The ECA is an act which was established to ensure the delivery of certain commodities or products, the supply of which if obstructed owing to hoarding or black-marketing would affect the normal life of the people.
    • The ECA was enacted in 1955. This includes foodstuff, drugs, fuel (petroleum products) etc.
    • It has since been used by the Government to regulate the production, supply and distribution of a whole host of commodities it declares ‘essential’ in order to make them available to consumers at fair prices.
    • Additionally, the government can also fix the maximum retail price (MRP) of any packaged product that it declares an “essential commodity”.
    • The list of items under the Act includes drugs, fertilizers, pulses and edible oils, and petroleum and petroleum products.
    • The Centre can include new commodities as and when the need arises, and takes them off the list once the situation improves.

    How ECA works?

    • If the Centre finds that a certain commodity is in short supply and its price is spiking, it can notify stock-holding limits on it for a specified period.
    • The States act on this notification to specify limits and take steps to ensure that these are adhered to.
    • Anybody trading or dealing in the commodity, be it wholesalers, retailers or even importers are prevented from stockpiling it beyond a certain quantity.
    • A State can, however, choose not to impose any restrictions. But once it does, traders have to immediately sell into the market any stocks held beyond the mandated quantity.
    • This improves supplies and brings down prices. As not all shopkeepers and traders comply, State agencies conduct raids to get everyone to toe the line and the errant are punished.
    • The excess stocks are auctioned or sold through fair price shops.

  • Digital currency plan made in China

    Central banks all over the world have had mixed feelings towards cryptocurrencies. Some of them have resorted to banning them altogether. And yet, cryptocurrencies exist and have been flourishing. But China seems to be bent on taking the “road less travelled”. This article explains the various aspects underlying the China’s move. These somehow apply to all the central banks, including the RBI. Read more to know more about such aspects.

    Digital currency by China’s central bank

    • In December 2019, a pilot programme was launched in Beijing to intensively advance the trial work of fintech innovation regulation.
    • This pilot has now been expanded to include several other cities.
    • This expansion of the pilot marks the initiation of China’s central bank digital currency (CBDC).
    • Christened Digital Currency Electronic Payment (DCEP), available via a mobile wallet app.
    • It is pegged 1:1 with fiat currency, and designed to replace M0 which comprises currency issued by the PBoC less the amount held by banking institutions.
    • This is the first such serious initiative in the whole world.

    Why central banks are sceptical of cryptocurrencies?

    • Historically, monetary authorities everywhere have been sceptical of cryptocurrencies.
    • The reasons for scepticism includes following problems-
    • 1) Wild fluctuations in the value of cryptocurrencies.
    • 2) The implied challenge to the monopoly of central banks in issuing fiat currencies.
    • 3) The looming possibility of software bugs.
    • 4) The tainted shadow of the dark web.

    But some central banks have been planning to issue fiat digital currency

    • Authorities were far more intrigued by CBDCs.
    • In fact, the Basel-based Bank for International Settlement (BIS) has been conducting surveys on this issue for some time.
    • The recent survey of 2019 “Proceeding with Caution – a Survey on Central Bank Digital Currency” revealed that while in general, central banks have been proceeding cautiously towards introducing central banks digital currencies.
    • Some have been planning to issue a fiat digital currency in the short to medium term.
    • In particular, the survey revealed that nearly 25% of central banks have the required authority to issue a CBDC, while a third do not, and 40% remain unsure.

    If you cannot beat them, join them

    • So, what factors led China to release the cryptocurrency?
    • Chinese investors were always attracted to cryptocurrencies.
    • With the bearish turn in the Chinese stock market in 2015-16, bitcoins became increasingly popular as an alternative asset class in China.
    • As in media reports, in the recent past, China has emerged as the capital of the crypto ecosystem, accounting for nearly 90% of trading volumes and hosting two-thirds of bitcoin mining operations.
    • The PBoC tried hard to curtail this exuberance but achieved limited success.
    • The recent move to introduce the CBDC in China is a logical outcome of the efforts to curb and tackle its runaway cryptomarket practices.
    • Or, the philosophy of the PBoC could simply have been, if you cannot beat them, join them.

    Advantages and concerns

    • At a practical level, the benefits of CBDC are manifold.
    • First, paper money comes with high handling charges and eats up 1% to 2% of GDP.
    • Second, by acting as a powerful antidote for tax evasion, money laundering and terror financing, CBDCs can materially boost tax revenues while also improving financial compliance and national security.
    • Third, as a tool of financial inclusion, particularly in emergencies, direct benefit transfers can be instantly delivered by state authorities deep into rural areas, directly into the mobile wallets of citizens who need them.
    •  Fourth, CBDCs can provide central banks with an uncluttered view and powerful insights into purchasing patterns at the citizen scale.
    • In the long run, it is believed that CBDCs will make cross-border payments fast and frictionless.

    Concerns

    • All these salutary benefits come packaged with a deep and abiding concern about the relentless rise of a surveillance state and the concomitant erosion in citizen privacy and anonymity.
    • If face-recognition technology enables states to spy on the physical movement of citizens, will CBDCs be used to spy on every movement of their money?

    But how Central bank’s digital currency is different from private cryptocurrencies such as Bitcoin?

    • An earlier research paper by PBoC Deputy Governor favoured a two-tier CBDC model.
    • In this model instead of directly interacting with the public, the central bank would involve financial intermediaries such as commercial banks.
    • In tier 1, the central bank would interface with financial intermediaries.
    • In tier 2, the financial intermediaries would interface with the general public.
    • Advantage? Such a model is accretive in that it preserves the power of existing financial systems and extends their influence further.
    • It is believed that the DCEP uses a DLT architecture (with central controls) which preserves the primacy of the monetary authority, unlike private cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) that are truly decentralised.

    Silver bullet to slay three dragons

    • What may China be signalling with the launch of DCEP?
    • First, on the world economic stage, it may want DCEP to challenge the hegemony of the U.S. dollar as the default global reserve currency.
    • Second, in its war with American BigTech, it may want to showcase DCEP as its weapon of choice to counter FB or Facebook’s Libra, which is planning to offer a common cryptocurrency to 2 billion-plus FB users across the world.
    • Third, and still in the realm of speculation, it may wish to use the DCEP to clip the wings of AliPay and WeChatPay, gigantic fintech duopolies that control 90% of the China’s domestic digital payments, and whose ambitions may one day pose a threat to the aura and authority of the central bank.

    Consider the question “Most of the central banks have been sceptical in their attitude toward the cryptocurrencies. Yet, they persisted. Next came the Supreme Court decision lifting ban on them. In light of this, examine the advantages and concerns that come with the cryptocurrencies.”

    Conclusion

    From gold to silver to paper to digital, the march of currencies goes on. China has rolled the dice on central bank digital currencies, challenging other nations to follow. Welcome to the future of money.

  • Neglect of demand side

    What should the government focus on first: increasing demand or streamlining the supply side. This question is at the heart of the debate that has been going on after the government announced the stimulus package. This article argues on two lines- Inadequate size of the package and the neglect of the demand side in the package.

    Why stakeholders are not happy with the package?

    • Agriculture sector: There is relief for agriculture in the form of a concessional credit line of Rs 2 trillion, but loans are neither automatic or assured.
    •  Marketing reforms and infrastructure creation are distant promises.
    • MSME sector:  The backbone of the economy that provides 25 per cent of employment, 32 per cent of the GDP and 45 per cent of exports, is unhappy despite the Rs 3 trillion line of credit for loans without collateral.
    • In their experience, lenders are not always supportive in extending loans.
    • While buyers-central and state governments, public sector firms and the private sector- owe them as much as Rs 5 trillion.
    • What is more, most MSMEs just do not have the resources to pay wages or meet fixed costs on electricity, rent or interest during the lockdown period.
    • Corporate sector: There is nothing for the corporate sector in manufacturing or services.
    • The distressed sectors such as airlines, automobiles, hotels, restaurants, and tourism have been ignored.
    • Ironically, there is little for public health, already in a dilapidated state.
    • Even stock markets, characterised by irrational exuberance in the past month, have dropped.

    Government expenditure in the fiscal stimulus

    • The fiscal stimulus, which can be defined as government expenditure that could stimulate demand, is difficult to separate.
    • This is because the package is neither clear nor transparent about the cost to be borne by the government in each component.
    • Even so, there are 12 estimates by analysts in financial sector institutions, suggesting that the fiscal stimulus is in the range of 0.7 per cent to 1.3 per cent of the GDP.
    • The effective fiscal stimulus, in terms of extra resources provided by the government, is Rs 1.76 trillion, or 0.8 per cent of the GDP.
    • Its contribution to domestic demand will be minuscule, given that private final consumer expenditure in India is about 60 per cent of the GDP.

    Focus of the package: supply side

    • It is clear that the design of this relief package seeks to focus on the supply side.
    • Package emphasises on providing liquidity through lines of credit, where the RBI is providing as much as Rs 8 trillion.
    • Focus is not on the demand side by stepping up government expenditure.
    • This is done with the aim of minimising the cost to the government.
    • The arithmetic is obviously imaginative — as much as Rs 10 trillion of the relief package will have to be financed by sources other than the Centre and the RBI.

    So, let’s understand why focus on supply side is flawed strategy

    • This stress on the supply-side, while neglecting the demand-side, reveals a flawed understanding of economies in crisis.
    • Speed of adjustment: Even in normal circumstances, the speed of adjustment of the supply-side is slow because supply responses take time.
    • Whereas the speed of adjustment on the demand-side is fast as incomes spent raise consumption demand without any time-lag.
    • At present, if there is little or no increase in demand, supply responses will be slower than usual because producers would not wish to pile up inventories of unsold goods.
    • In terms of the chicken-and-egg parable, demand must be revived first to kickstart the economy.
    • For this reason, the fiscal stimulus should have been much larger.

    Excessive concerns over fiscal deficit

    • The decision-makers have been timid, intimidated by the prospect that, because of revenue shortfalls (2 per cent of the GDP or more), the fiscal deficit would be 5.5 per cent of the GDP.
    • Which would have exceeded the budget estimate at 3.5 per cent of the GDP.
    • The conclusion drawn, wrongly, is that there is no fiscal space.
    • The obsessive concern about the fiscal deficit is deeply embedded in government thinking.
    • In this situation, the extra fiscal stimulus should have been Rs 7-9 trillion i.e. 3-4 per cent of the GDP and that would have been modest compared to what other countries have done.

    Monetising the deficit  and issues involved in doing so

    • This enlarged fiscal deficit (3-4 % of GDP) cannot be financed by market borrowing.
    • Such market borrowing would simply drive up interest rates and nip recovery in the bud.
    • It would have to be financed by monetising the deficit — RBI buying government T-bills — printing money, now termed “helicopter money”.
    • Inflation concerns: The idea that monetised deficits will unleash inflation is blind to the reality that, at this juncture, if there is no further intervention by the government, the GDP could contract by 5 per cent in 2020-21, with lingering consequences.
    • In fact, a monetised deficit might be the only way of increasing aggregate demand to revive economic growth.
    • Rating downgrade issue: The worry about a downgrade from credit rating agencies is bizarre.
    • For one, their ethics and integrity have seen steady erosion.
    • Moreover, how many sovereign governments will they downgrade?
    • In fact, we might be better off without the footloose and volatile portfolio investment inflows.

    Consider the question- “Do you agree with the view that the focus of the supply side should be at the heart of any stimulus package announced in the financial crisis? Give reasons in the support of your agreement.”

    Conclusion

    If the government does not accept the necessity or wisdom of expansionary macroeconomic policies, it must set out its alternative plan for recovery. The relief package will not suffice.