A couple of days ago, a relatively new BJD leader, a Rajya Sabha member, said in an interview in a national daily that he etched the massive 2019 victory for the BJD. Amar Patnaik, a gentleman-politician, claims to have devised all winning strategies.
He said his unique insight into electoral surveys and matching ground strategies paved the way for the party’s thinking leaders to take perfect decisions to ensure the landslide victory. The claim sounds rather weird and out of place. Lately, when the Union Finance Ministry was toying with the idea of printing more notes than usual to overcome a pressing crisis due to an unprecedented pandemic across two years, Amar Patnaik has kind of put his foot down saying it should be the last resort without clearly citing specific, truly practicable ways out. Renowned practising economists including experienced politicians, entrepreneurs and planners have supported note printing as the only solution to the grave crisis by making clear why it should yield desired results.
Uday Kotak, once the CII president and the head of private sector Kotak Bank, had recently said that this is the exact time to enlarge the balance-sheet of the Government by having the RBI engaged in printing more notes than usual. Nobel laureate Abhijit Banerjee has also been putting a great deal of emphasis on printing money and transferring cash directly to the poorer sections of society. More interestingly, former Finance Minister P Chidambaram, branded as a core-corrupt politician, had also urged the Government to borrow money or print bank notes for spend aggressively without worrying too much about the widening fiscal deficit figures.
The urgency for deficit financing has turned excessively huge after the devastating impact of the second Covid wave and its deadly impact on the pace of economic growth. Successive months of Covid disruption have increased income inequality globally, not only in India.
Several highly credible institutions have spelt out the dismal growth forecasts for the coming years. The RBI has revised its real GDP projection from 10.5% to 9.5% in 2021-22. Global rating agency Moody's has recently revised India's GDP from 13.7% to 9.3%. The State Bank of India's research team has forecast a GDP lower than 7.9% against the earlier projection of 10.4%. The lower growth will have an impact on the country's fiscal deficit, initially targeted at 6.8% of the GDP in 2021-22. The fiscal deficit was 9.5% in 2020-21. Naturally therefore, the borrowing target for 2021-22 is kept at a whopping Rs 12 lakh crore due to utter helplessness.
It should be known well that the major global economies are responding to the Covid-induced recession by adopting unorthodox stimulus measures, including printing money as there is no other way out in sight.
The US, the European Central Bank, Japan and even emerging economies such as Turkey and Indonesia are printing more money than normal to bring economies back to life. India is no superpower a nation economically to avoid a tested method of survival with least risk. Printing money is critically necessary at the current unprecedented crisis across the globe. The Reserve Bank of India can buy Government debts/bonds directly. This would instantly inject cash into the economy something very similar to printing new money, though to be done electronically. The RBI can also buy bonds from corporates and lenders. The seller is able to get rid of the illiquid assets and deploy funds elsewhere. The US Federal Reserve had used this strategy extensively to counter the 2008 crisis, as is widely known. The same technique is being used for the Covid crisis.
Not surprisingly, the European Central Bank has removed the limit on bonds it can buy from any single Euro zone country. The Bank of England is too willing to lend money to the national Government if urgently required, though on a temporary basis. The Bank of Japan is buying unlimited amount of Government bonds to help the country tide over a most difficult crisis. The Indian experiment is not new. During the 1980s, debt monetisation by RBI was the norm. That continued well into the late 1990s. Practising economists have not forgotten that the Government deficits were being routinely monetised through ad hoc treasury bills all that time.
It’s only in 1994 that curbs were imposed under a pact between the RBI and the Government to ensure both the parties phased out of the prevailing system completely after 1997. But this arrangement truly was not abolished.
It continued in another form. The RBI kept picking up unsubscribed public debt auction. The same outcome was achieved. Eventually, the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 barred the RBI from buying any kind of primary issuances of Government debt. India is in great need of money to flow across the masses. Hence, the economy needs massive fiscal stimulus. As estimated by experts, 9%-10% of GDP must be spent immediately. This translates into Rs 18-20 lakh crore circulating freely.
The budgeted borrowing in FY21 is kept at Rs 8 lakh crore, which cannot be lost sight of to remain live if not vibrant. Market alone cannot organise or support this borrowing as interest rates willrise sharply and the privatesector and other big time borrowers will have to be denied credit for quite sometime.
Besides, high interest rates and lack of credit will kill economic activity to a great offending extent. For all this, the RBI alone can provide the critically required funds by printing money.
There is no other way out under the grave circumstances of the current times. Indeed, there are risks involved, but the returns and benefits would far outweigh the probable risks, namely, high inflation, high current account deficit, currency depreciation and reckless spending that could fuel NPAs. But massive economic contraction might never pose these risks at all. This is the time for wartime financing; and normal rules will never apply. Printing money will generate demand, kick-start projects, help businesses and employees and workers. And given the steep economic dip, risks of overheating are trivial. Procedural caution may kill the India story.
So, BJD MP Amar Patnaik doesn’t sound fair and logical in his arguments against note printing. He was in auditing job, not setting economics right. Maybe, he has missed out on the subtle aspects of saving economy during a huge crisis as the ongoing pandemic.
And lastly, Amar Patnaik was not certainly instrumental in etching victory for the BJD. It is Naveen Patnaik’s charisma and aura alone that has kept the BJD flying high.