Calls for debt monetisation gain traction as Covid-19 cripples economy

Many other economists have also called for adopting unconventional tools to help the poor and boost the economy
After the government, over the weekend, hiked market borrowing by 54 per cent in the wake of the coronavirus pandemic, calls for monetising debt seem to be gaining traction with experts saying that repercussions of not spending to support the economy will be irreparable.

Conservative monetary economist and former RBI chief Raghuram Rajan, over the weekend, also pitched for monetising public debt and higher fiscal deficit in a ''measured'' manner to protect the economy and the poor and the vulnerable in these ''abnormal times''.

The first such call came in early April when Kerala Finance Minister Thomas Isaac after the state had to pay a tad less than 9 per cent for Rs 6,000-crore market borrowing to meet the exigencies arising from the pandemic.


Reports of states planning to slash expenditure are coming in. With hard budget constraints they have no other option. The choice has rational on its own. However,collectively they will undermine aggregate demand and worsen the economic disaster. #COVID2019india

— Thomas Isaac (@drthomasisaac) May 6, 2020
Coronavirus has snuffed out lives of more than 2,100 people and infected nearly 63,000 in India. Globally, the death toll is over 279,000 and more than 4 million have been infected.

Another solution for raising funds suggested by Isaac was to launch Covid bonds with under 5 per cent interest rate by the Centre and paying the states from the mop-up. Isaac had said RBI should buy such bonds from the Centre.

Many other economists have also called for adopting unconventional tools to help the poor and boost the economy.

Monetisation is generally central bank printing more currency by expanding its balance sheet.

Monetisation should not be a constraint on public spending, Rajan said, adding, "the government should be concerned about protecting the economy and should spend what is needed".

Devendra Kumar Pant, Chief Economist at India Ratings, also backs the idea of government borrowing more and supporting the economy at the cost of fiscal prudence, saying the repercussions of not spending now to support the poor and the economy will be much more severe and irreparable.

"The need of the hour is money. The Centre being the best and the largest borrower, it has to do the heavy-lifting in these extraordinary times and should not be constrained by the worries about fiscal deficit and other attendant pains.

"Money is the only need now," Pant told PTI without directly calling for monetising debt.

According to him, the Centre should bring money from wherever possible and give to the states as loans at a lower interest rate than they are being forced to pay now.

That Kerala, despite being the best performing large state in the Covid-19 fight, had to pay 8.96 per cent is not something that the Centre should ignore, Pant noted.

He underlined that talking about fiscal prudence now will be suicidal "as the repercussions of not spending now will be so severe that it will take years to return to normalcy".

Singaporean lender DBS Bank's economist Radhika Rao also favours higher spending and suspending the FRBM (Fiscal Responsibility and Budget Management Act) goal posts given the extraordinary risks to growth and the need for pump-priming the economy.

She also expects a larger fiscal package being offered soon as the so far given support -- Rs 1.7 trillion or 0.8 per cent of GDP -- is much smaller than the anticipated economic cost of the lockdown.

"The second package should be a combination of higher food and cash handouts to the vulnerable, backstop for MSMEs, shouldering part of the wage burden for smaller enterprises, temporary relief to taxpayers, amongst others," she told PTI.

The Reserve Bank should contain the borrowing costs of the Centre and the states by higher bond purchases which will help quell bond yields, she added.

Rajan's comments on monetising deficit has came after the finance ministry on May 8 decided to raise market borrowing by 54 per cent to Rs 12 trillion for FY21, up from Rs 7.8 trillion estimated in the budget. This will take the total market borrowing by the Centre and the states to close Rs 24 trillion this fiscal.


PSBs contacted more than 95% of borrowers eligible for emergency credit lines & working capital enhancements between March 20 - May 6. The amount sanctioned jumped to Rs 54,544 crore, more than double the amount 2 days ago. Number of cases covered more than tripled. @FinMinIndia

— NSitharamanOffice (@nsitharamanoffc) May 9, 2020
"Monetisation will neither be a game-changer nor a catastrophe, if done in a measured way. However, the caveat-- it should be measured -- is key," Rajan said.

On fiscal deficit, which is slated to top 5 per cent this year, Rajan in his blog post said the government "should also worry about getting fiscal deficit back in shape over the medium term, and the more it spends now, the harder that will be. But its inability to finance itself or fears of monetisation should not be a constraint".

According to Rajan, the professor for finance at the Chicago University, large government spending will directly ignite demand which is needed especially "in abnormal times like this when demand is depressed and the environment is disinflationary, and this should not be a central worry".

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