Growth Will Cure Ills of Monetisation–Economic Times

Clipped from:

IMF chief economist Gita Gopinath’s advice against RBI monetising the fiscal deficit, citing implications for market confidence and inflation, errs on the side of caution.

This seems to rely heavily applying differing norms to emerging markets as compared to the advanced economies, all of which have been creating money hand over fist, buying not just government debt but also private debt. True, macroeconomic management has been more fragile in emerging markets like India, but the stability of death cannot be deemed superior to the unsteadiness of the living.

Whether the central bank directly picks up the bonds floated by the government or the banks subscribe to the debt issue, the difference is not much, considering that banks are dealing in the liquidity created by the central bank under assorted windows. So, the only question, really, is whether direct monetisation is preferable to indirect monetisation or not. When banks respond to a public debt issuance, their bidding will have some imprint of market demand, whereas when RBI directly picks up the bonds issued by the government, the central bank itself sets the yield.

When the government spends the money raised via additional public debt, financed by direct or indirect monetisation, the result is the same, whether the potential for inflation or the potential for crowding in private investment. Supply constraints jack up retail prices, but economy-wide price changes are negative to minimal. The point, really, is to spend wisely. As opposed to a generalised scheme of pushing money into the hands of citizens who might or might not spend it on buying goods and services, it is entirely preferable that the government spend the money on projects chosen from the National Infrastructure Pipeline.

Of course, care must be taken to lift the generalised curbs on movement of goods and people, pandemic control being exercised at the level of micro-containment zones and through practices such as social distancing and wearing of masks. People must be free to respond to the stimulus.

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