The road to recovery is to print a new currency ?
The global financial crisis had lasted only 12 years. In 2020, the world will once again face an economic crisis. After the second Covid wave and its impact on the rate of economic recovery, sudden demands for a budget deficit arose. Income inequality has increased globally due to Covid for the second consecutive year.
The root cause of this crisis is the global Covid-19 pandemic. Its impact on the economy is different from that of the global financial crisis. However, traditional macroeconomic theory and the model were again found to be inadequate, and economists turned once again to the work of Keynes and recent Post Keynesian scholars.
Keynes believed that the velocity of circulation of money fluctuates and is often underutilized due to the economic recession. The effect of the money supply on interest rates and the effect of interest rates on aggregate demand provides a mechanism by which changes in the money supply affect the level of economic activity.
So can we increase the aggregate demand of the economy by increasing the money supply?
According to Keynes, if interest rates fall due to an increase in the money supply, the investment rate will increase and increased investment will lead to an increase in income through the multiplier. If this happens, the total expenditure (i.e. the multiplier) will increase aggregate demand) and, as a result, real national income (gross output) increases.
The question now is how to increase the supply of money?
The two determinants of money supply are: High powered money and money multiplier.
High powered money is the currency issued by the govt. and the RBI.
Money multiplier is the degree to which the money supply increases because of the increase in high powered money.
Therefore the money supply can be increased by increasing the high powered money.
When the currency-deposit ration decreases i.e. people keep more money in banks as deposits.
Currency- reserve deposit ration falls. It means the reserves ratio to be kept compulsorily (CRR) falls.
How can the money be raised through printing? Printing of new currency by RBI is considered as the last option. The govt. tries to manage its deficit through borrowings and investment in increasing the revenue through taxes and a smart disinvestment policy.
Monetisation happens when RBI buys bonds from the Govt. directly. This measure creates new money but it does not increase the nominal GDP. Currently the Govt. expenditure has increased manifolds. The fiscal deficit is around 6.8% to 7% of GDP whereas the revenue sources have not expanded.
Interest rates
At its monetary policy meeting ending on 7th April, the Reserve Bank of India (RBI) kept its rates unchanged, which was in accordance of market expectations. The RBI left the reverse repurchase rate, the repurchase price and the marginal standing facility fee at 3.35%, 4.00% and 4.25%, respectively.
The decision of no change was mainly due to the result of a gradual and uneven recovery in the economy amid particularly strong inflationary pressures, pushed predominately because of supply chain disruptions, and rather improved food costs. Moreover, the Bank stated that regardless of easing fuel prices in February core inflation rate increased whilst consumers’ inflationary expectations multiplied slightly over the three months horizon. Overall, inflationary pressures were situation to balanced risks as more suitable agricultural output must control food prices, whilst they have an impact on a higher commodity prices and logistical hurdles ought to increase prices some other place in the economy. The current rise in Covid-19 cases and tighter lockdown measures in some foremost economies weighed on the banking sectors short-term outlook. However, the resilient rural sector backed by a well deserving financial stimulus is expected to give a push to the economic recovery at the earliest.
Commenting on the RBI’s latest meeting, Barnabas Gan, an economist at UOB, noted:
“India’s growth prospects will therefore depend largely on how COVID-19 evolves. Thus far, macroeconomic indicators have been recovering, and the outlook is also expected to improve further with the rollout of the vaccine programme across the country. However, we are worried over the renewed surge in COVID-19 cases, which in turn could inject a considerable downside risk to RBI’s (and UOB’s) GDP growth outlook of 10.5% in FY2021/22. We keep to our view for RBI to hold policy rate unchanged for the whole of 2021, although a risk of a rate cut in the second half of 2021 may be possible should COVID-19 stays unchecked in India.”
Investment
Investment is driven by the expectations from future. India has always been a great investment option for the investors. For an impressive recovery, India needs a good amount of long – term investment. The post COVID-19 seems quite promising, as the vaccination drive is finally centralised, after much of political drama by the states. Instead of confrontation, the states need to co-operate to overcome the post COVID-19 after effects. They need to keep their house in order because sooner or later the pandemic will subside. This is the time to invest in the health and health infrastructure of their respective states and look after its people, create utilities at war footing and to deliver to the poorest of the poor. Such dedicated efforts from each state will pay hugely not only in terms of a better infrastructure but more importantly, people of such states will march ahead and help the state to perform well in every indices. If the state is indifferent today, people will indifferent tomorrow. The state machinery needs to impress the people and then the sentiments of the people to do their bit towards the state’s financial recovery will be a soothing reality. This is how investment will get a boost in every state and finally India as a nation will find it easy to restore its pre level COVID-19 statistical spot.
To conclude, as a lot of indirect monetization is already happening in the Indian economy. To support the increase in govt. expenditure, it must not resort to direct monetization. It will increase liquidity in the system and therefore it should be the last resort, after all other options are timely exhausted. The immediate focus of the govt. must be to speed up its disinvestment programme and improve its export earnings. As in the COVID times the import of vaccines, medical equipment, supplies etc. has increased therefore our export performance needs to improve. The increase in govt. expenditure in export units will create employment opportunities and this is how investment will flow in export- oriented sectors and this would increase the aggregate demand.
