Summary of “Should the RBI print money to revive the economy?”

Here is the link to the article https://www.newslaundry.com/amp/story/2020%2F05%2F08%2Fshould-the-rbi-print-money-to-revive-the-economy-its-not-as-simple-as-it-sounds?__twitter_impression=true

Due to Covid 19, government imposed lockdown in whole country due to which almost all businesses were shut down. Due to this government’s income in the form of GST declined. Foreign trade was also impacted due to which government’s income in the form of customs and other duties also declined. State government’s source of income – sales tax/ VAT on petrol and diesel – took a hit as consumption of fuel declined. Also there were no real estate transactions which means no stamp duty and as alcohol shops were also closed no taxes were collected from their too.

In such crisis times, every person share their views on how to revive economy and all have one answer – RBI will print money from thin air and will give it to government for spending. But there’s a catch here. What looks easy doesn’t mean it is easy.

There are few points which need to be taken care of. They are –

• The money which the government is printing and distributing is just fiat money i.e. it is not backed by any commodity. Just because government says that it is money people believe and accept this as money. One more reason people accept this fiat money is that they know others will accept it (Example – ‘A’ use this money because he knows that ‘B’ will accept it and ‘B’ accept it because he know ‘C’ will accept it).  Government too create demand of fiat money by accepting taxes in home currency. The problem also lies in taxes. In India, if government reduce tax evasion then this will ensure in more demand of rupee.
• Another point is that if government will infuse money into economy to create demand then it will lead to inflation. Because more money will be chasing the same quantum of goods. But according to survey done by RBI on capacity utilization it was found that one-third capacity is lying unused. So manufacturing companies can increase production without affecting prices (inflation).
• Now here comes an interesting point. RBI prints money and buy government bonds. Government spends this money through which it reaches many people. These people spend this money further in buying goods/services. Through this the money reaches to corporates and they deposit it in bank accounts. Then the banks park the excess money with RBI at lower rate (if bank buy government bonds they earn 6% interest but parking with RBI in reverse repo window yields 3.75% return, according to latest rate). This also leads to lower tax collection from banks as they earn less.
• Creating money and infusing it into economy can also lead to depreciation of economy. Foreign investors will take an exit which will lead to more demand for other currency and selling pressure on rupee will lead to a rise in exchange rates. Also, currencies of countries like United States, United Kingdom etc. have global demand. So they can print money without damaging exchange rates.

Hence there are challenges in taking this step. But at the end it’s the call of government to take decision on it.