No plan to monetise debt for now, GDP may not shrink too severely: DEA Secy

Topics GDP | RBI | Finance Ministry

Bajaj also said that based on tax collections so far, India’s economic contraction in FY21 may be less severe than previously anticipated
The finance ministry has not discussed any proposal to monetise its deficit with the Reserve Bank of India (RBI), Economic Affairs Secretary Tarun Bajaj said on Thursday.

Speaking at an event organised by industry body Ficci, Bajaj said that based on tax collections so far, India’s economic contraction in this fiscal year might be less severe than anticipated and that the proposal of a ‘bad bank’ had been discussed internally, but no decision had been taken.

“Currently, there is no proposal for debt monetisation on the table. Questions on fiscal position and debt monetisation plan should be asked after three-four months,” said Bajaj.

Economists, including former RBI governor Raghuram Rajan, and former advisor to the Prime Minister, Rathin Roy, have advocated that the government can get the RBI to monetise deficit, provided it has a clear expenditure plan on where it wants to spend the resources it raises.

Monetising the deficit is when RBI directly purchases government bonds (G-secs) on the primary market to help with the Centre’s expenditure. In turn, the RBI prints more money to finance this debt. The practice of monetising deficit was in vogue till 1997, when it was discontinued by then RBI governor C Rangarajan.

So far, the RBI has been ‘indirectly monetising’ by increasing the purchases of G-secs in the secondary market through open-market operations. If a decision is taken to directly monetise the deficit, that will also mean the Centre will borrow even more than the Rs 12 trillion it has announced so far for 2020-21 (FY21).

As the pandemic and lockdowns brought economic activity to a halt, analysts have slashed their estimates for FY21 GDP, with some expecting a contraction of as much as 9-10 per cent.

“The June advance tax collections have actually been better than what we were expecting and that makes us believe the contraction in the economy may not be as much as some are expecting,” Bajaj said at the event. India will witness a V-shaped recovery as the economic impact of Covid-19 is abating, said Bajaj.

The secretary said that while there had been no final decision on plans for a bad bank or an asset restructuring scheme, there have been discussions internally within the government. This comes weeks after Finance Minister Nirmala Sitharaman said the Centre and RBI were discussing a one-time asset restructuring for non-performing assets.

Bajaj also reiterated that India would expand production-linked incentives to other sectors. Just days ago, he had said at an event that the Ministry of Electronics and Information Technology’s production-linked scheme for mobile phone manufacturing would be offered to other sectors as well.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel