to-print-cash-or-not-to

Context: Confederation of Indian Industry (CII) suggested that RBI print Rs. 3 lakh crore which the government can use as a fresh fiscal stimulus.

Background:

  • Confederation of Indian Industry (CII) recently asked the central government: 
    • An expansion of the central bank’s balance sheet to accommodate a fiscal push of 1.3% of GDP.
      • To provide a ₹3-lakh crore stimulus,
    • Reduction in fuel taxes,
      • Reduction in excise duties on fuel, 
      • Some temporary GST rate cuts and 
      • Inclusion of Aviation Turbine Fuel (ATF) under the GST regime.
    • Enhancement in cash transfers to households to revive demand,
    • Policy measures for employment generation,
    • Increase funding to MNREGA to help revive demand in the economy,
    • Further recapitalisation of public sector banks (PSBs) to the tune of Rs 20,000 crore, in addition to the Rs 20,000 crore allocated for PSB recapitalisation in the FY22 Union Budget and
    • Extension of the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs till the end of FY22.

From where this ₹3-lakh crore stimulus will come?

  • The government’s finances are already quite stretched more than twice the prudential norms set by the Fiscal Responsibility and Budget Management Act in the past.
  • CII asked RBI to expand its balance sheet in order to accommodate the increased stimulus so that lending cost remained contained.
  • It wants the government to ask RBI to print ₹3-lakh crore money

Past Experience:

  • Historically, corporate India has viewed additional spending of this nature as fiscally irresponsible and wasteful.
  • When the government borrows from the market to spend on such doles (providing cash transfer and subsidy), it raises the cost of borrowing for companies.

Impact of such stimulus:

  • Such cash transfers will make Indians lazy and kept them poor.
  • Supporting the poor through MGNREGA is the biggest impediment to India’s growth.
  • If this additional spending is funded via fresh money, it will keep the interest rates, which the companies pay when they borrow money from the market.
  • Printing money can lead to inflation.
    • India already has high inflation, it will hit the poorest hardest.

Alternatives:

  • Government should focus on ease of doing business for the private sector.
  • Compressing pay ratio in the corporate world: Companies reducing salaries of their top employees and using that money to alleviate the stress among the staff.
  • Wealth Tax
  • Inheritance Tax: If we assume that every year 5% of the total wealth of top startup get transferred to their children as an inheritance, then even the modest taxation of one-third of such inheritance would fetch Rs. 5.5 lakh crores. 
  • Front-loading capital expenditure: Prioritise capital expenditure. Such expenditure has a multiplier effect.

Related Facts:

Factors that decide on the volume and value of Banknotes to be printed:

  • The volume and value of banknotes to be printed in a year depends on various factors such as:
    • The expected increase in Notes in Circulation (NIC) to meet the growing needs of the public and 
    • The need for replacing soiled/mutilated notes so as to ensure that only good quality notes are in circulation. 
  • The expected increase in NIC is estimated using statistical models which consider macro-economic factors such as:
    • Expected growth in GDP
    • Inflation, 
    • Interest rates, 
    • Growth in non-cash modes of payment etc. 
  • The replacement requirement depends on the volume of notes already in circulation and the average life of banknotes. 
  • The Reserve Bank estimates the volume and value of notes to be printed in a year based on the above factors as well as feedback received from its own Regional Offices and banks regarding expected demand for cash and finalises the same in consultation with the Government of India and the printing presses.

Source: The Indian Express.