Our columnist Swaminathan S Anklesaria Aiyar has called for an Indian stimulus three or four times as large as the Rs 1,70,000 crore relief package announced last week. Economists like Rakesh Mohan support the view. Others worry about inflation and financial stability. Such worry is misplaced. A massive increase in India’s fiscal stimulus must be financed not by the banks but by RBI printing money. Banks must lend to the private sector, hit hard by the lockdown and global slowdown.
The US fiscal stimulus is massive, 10% of GDP.
While some prices, such as of drugs and those hit by broken supply chains, might see a short-term spurt, commodity, particularly energy, prices are still falling. But if the lockdown reduces GDP by 3% and the government responds with a stimulus of 3% of GDP, aggregate demand (and, hence, inflation) will be unaffected. Cheap imported materials from oil to metals and palm oil will dampen inflation arising from money printing by RBI. Financial stability may be trickier. If banks were to fund a huge fiscal stimulus, they would run out of funds for financing businesses and individuals. That would be disastrous for industry and services. So, the banks must be told to keep lending to the private sector. RBI has helpfully offered ample cheap repo funding to banks provided this is used for buying corporate bonds and commercial paper. Moratoriums on loan and interest repayments are essential, despite the moral hazard entailed.
At the end of the crisis, the banks may well face a big jump in bad debts. RBI must create conditions for tiding over the coming NPA crisis. Indeed, the government needs to provide massive grants and cheap finance to offset such NPAs. A massively larger stimulus should be accompanied by safeguards for the financial system.