Eminent economist says RBI must not print money to finance fiscal deficit
The eminent economist also said that if there is no major third wave of Covid-19 India may see a faster economic recovery.
Eminent economist Pinaki Chakraborty on Sunday said the Reserve Bank of India (RBI) should not print money to finance the fiscal deficit as it shall lead to fiscal profligacy. The director of the National Institute of Public Finance and Policy (NIPFP) said that high inflation is a concern and there is a need to stabilise inflation to manageable levels.
“I think this debate started in the beginning of the pandemic and printing money for deficit financing was not considered. I don't think the RBI should ever do that. We stopped it in 1996 through a memorandum of understanding (MOU) between the RBI and the government. We should not go back to it again,” Chakraborty was quoted as saying by news agency PTI.
The eminent economist also said that if there is no major third wave of Covid-19 India may see a faster economic recovery. Pinaki’s statements come amid recent calls from various quarters to print more money to finance the fiscal deficit. The RBI’s monetisation of the fiscal deficit means that the central bank will print currency for the government so that it can take care of any emergency spending to bridge its fiscal deficit. Chakraborty highlighted that India’s macroeconomic situation is comparatively better than what it was during the first wave of the pandemic.
Pinaki while responding to a query on cash bailouts for the people who lost their jobs said that the employment cycle cannot be insulated from an economic contraction. He said that support provided through fiscal measures can provide livelihood security to some extent in the short run. “Faster recovery is the key to enhancing employment,” Pinaki said. Pinaki also said that it is necessary to understand the sectoral nature of the stimulus rather than seeing whether it was given through the budget or through any other means, while responding to the query on the fiscal impact of the government's stimulus measures. He said the sole purpose of the stimulus is to revive the economy. He said that as far as budgetary stimulus is concerned there has been an increase in the fiscal deficit to the extent of 9.5% of the GDP in the last fiscal.
Pinaki highlighted that if the state government’s fiscal deficit is taken into account it will stand around 4.5% of their state GDPs, cumulatively 14-15% of the GDP. “We are talking about a 90% debt to GDP ratio. The fiscal headroom for increasing expenditure is limited,” Pinaki said.
He highlighted that it is not the quantum of the fiscal stimulus alone, one also has to look at the aggregate stimulus provided by the government and its design in terms of how it can navigate the crisis.
Finance minister Nirmala Sitharaman announced ₹1.5 lakh crore additional credit for small and medium enterprises, more funds for the healthcare sector, loans to tourism agencies and guides as well as waiver of visa fee for foreign tourists as part of a package in a bid to pus the revival of the pandemic-hit economy. These measures were announced in the backdrop of states lifting restrictions due to the decline in new coronavirus disease (Covid-19) cases. The economy also seems to be on path to recovery after one of world’s worst Covid-19 second wave of infections hit the nation,
The Aatmanirbhar Bharat package that was announced by the government in 2020 to help the economic revivial was estimated to be about ₹27.1 lakh crore, which amounts to more than 13% of the GDP and it also included liquidity measures announced by the RBI.
Chakraborty also pointed out that inflation has reached a challenging level and needs to be tackled in the next few months. Pinaki said that the contraction in the economy, job losses and rise in inflation also would have adverse distributional consequences. “Inflation is a worry and we need to stabilise inflation to a level which is manageable,” Pinaki said. Chakraborty said that the reduction of taxes on petrol and diesel would also mean a larger increase in the deficit of the central and state government, while responding to a query on reduction of taxes on petroleum products following the recent hardening of crude oil prices.
“It is a complex issue of fiscal management, macro management and inflation management. To say that you just reduce it because the prices have gone up also would mean that you would be borrowing more to finance your deficit,” Chakraborty said. Petrol prices have crossed the ₹100 per-litre mark in several states. Diesel is being sold above ₹100 a litre in some parts of states like Rajasthan and Madhya Pradesh. The central government levies a fixed rate of excise duty while states levy different rates of VAT.
(with inputs from PTI)
- Reserve Bank Of India