Is Printing Money the Solution to Reviving Indian Economy?
The Covid-19 pandemic has put immense pressure on the Indian economy as also in all countries of the world. The slowdown in the domestic economy means lower tax collection and higher government expenditure. The slow down in the global economy implies that our exports will suffer, which implies our production will be lower. Also, most countries are facing challenges in their respective countries and hence cannot support other countries.
This situation has put immense pressure on the government to increase its expenditure and announce relief measures to tide over the crisis. With a second wave, and another lockdown in April- May 2021 across several states, incomes of individuals have declined and so have consumption levels. In other words, the demand for goods & services in the economy has gone down.
Printing of money, in such a situation, may not be the ideal solution to revive the economy.
With a high fiscal deficit, the government’s finances have already been overextended during this crisis. Though the Reserve Bank of India has been trying to boost the liquidity in the financial system, a lot more needs to be done to revive the economy. Experts have suggested that printing money can be an ideal way to support increasing expenditure during the ongoing second wave of the pandemic. Additional cash printing is expected to help in direct cash transfers to poorer sections of the society. But there are also negative impacts of printing additional money. While additional money printing is likely to increase the demand for goods and services, it may lead to a sharp rise in inflation of these goods and services. The industry is operating at low utilisation capacity. Also, printing money is a well planned process, and security paper and ink have to specially be procured, which takes time.
It would be more appropriate to give additional cash to the poor in a sustained manner in the form of wages and salaries and not helicopter drop of money or direct cash as is being envisaged under printing of money. In fact, data shows that deposits in Jan Dhan accounts have increased during the crisis. Till consumer expenditure does not increase in a uniform manner, the multiplier effect will not take place in order to revive the economy.
There are also arguments that expenditure must be increased during a time when the economy is in a better state to produce and meet the demand. Every state is in a different phase of recovering from Covid. Therefore, timing of the expenditure in different parts of the country is also an important factor to take into consideration.
Given the current state, where lockdowns are still being imposed across several states in the country and there are speculations of a third wave, tax collections are severely impacted. During this time, taxes such as wealth & agriculture tax, as suggested by some, also cannot be immediately imposed. The imposition of agriculture tax can have political implications and wealth tax can deter investment and expenditure by the rich. Talking about agriculture tax, there are around 16 crore households working in the agro rural sector. The amount of manpower required to assess their incomes is very large and may not be worth the effort. We need to remember that once India had a marginal tax, at peak, above 90%. According to Lafer curve, tax collection suffered, and so increased tax evasion/avoidance.In sharp contrast, banks have a lot of liquidity & the government is still willing to extend support to the economy through various means.
Since there are projections regarding a 3rd wave, the government needs to consider an immediate medium & long term plan to avoid growth challenges it faced last year. Immediate support in the form of free healthcare services & food security is already being provided to the most affected section of the society.
- In the Short term, housing, construction with high inter-linkages with more than 250 industries can be increased in major cities across the country. The Government can finance such projects. The rising stock market index is a cear example that there is purchasing power with the people. Also, banks flushed with money can lend to people to buy houses. The increased construction of houses, labor intensive, provides employment as well as wages to people.
- In the medium & long term, a coordinated National Economic Plan needs to be formulated. A Macro Economy plan covering states and local bodies, sectors, and regions, including virgin North East, needs to be established.
- Foreign Companies need to be invited & incentivised to open shop in India. This initiative will increase employment as well as exports
- In the medium run, a Financing Plan also needs to be formulated covering Banks, NBFCs, MFIs. The Financing Plan must include taxation, borrowing and scope of monetizing deficit
- Innovation, growth & private participation is required and efforts should be made to encourage private sector participation, not discourage it.
- In a move to encourage employment opportunities, extending MGNREGA could also be considered.