Printing cash or not - the eternal question

The story: The pandemic has had a serious effect on the Indian economy, affecting the poor and middle classes the most. Many industry leaders have ask

Printing cash or not - the eternal question

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• The story: The pandemic has had a serious effect on the Indian economy, affecting the poor and middle classes the most. Many industry leaders have asked the government to issue a large fiscal support package to help citizens directly.
• What CII said: According to the Confederation of Indian Industries, the government should spend an additional Rs 3 lakh crore. It should be spent on these fronts:

1. to provide direct cash transfers to families with Jan Dhan bank accounts,
2. to increase MGNREGA allocation and provide more job guarantees in rural India,
3. to cut the Goods and Services Tax rates, and thus boosting demand, and
4. to extend the Atmanirbhar Bharat Rozgar Yojana, under which the government subsidises the provident fund contributions by employees as well as employers for two years.

• One more request: Apart from this direct spending of Rs 3 lakh crore, CII has also demanded that the government extends the Emergency Credit Line Guarantee Scheme (ECLGS), aimed at supporting businesses through this tough phase, to Rs 5 lakh crore. The CII has actually realised that without all this, economic recovery in India will be too slow.
• Why slow recovery: Data clearly show that in the wake of the second Covid wave, a significant majority of corporate respondents to Surveys reported infections among staff or their family. By May 2021, all sectors tracked by CII were showing considerable moderation. The CII was also concerned about people losing jobs in the aftermath of the second Covid wave and how this loss of livelihood and income could be bringing down the overall demand.
• Net summary: In sum, both production (or supply) and consumption (or demand) of goods and services are likely to be depressed in the coming period unless the government transfers money, one way or another, into the hands of the people. While it is true that India’s GDP will grow in the coming years, CII suspects the GDP growth rate could vary widely between 5% per year and 9% per year (the chart below) depending on several factors such as fresh stimulus, new reforms, and the state of the global economy. So, where will the additional Rs 3 lakh crore come from?
• Government finances: The fiscal deficit (the borrowings government does to meet the gap between its spending and revenues) is more than twice the prudential norms set by the Fiscal Responsibility and Budget Management Act. So the CII has urged the Government to ask the RBI to “expand its balance-sheet in order to accommodate the increased stimulus so that lending costs remain contained”. The CII wants the government to simply ask the RBI to print Rs.3 lakh crore worth of new cash and give it to the government to spend.
• A new development: Corporate India has always viewed additional spending of this nature as fiscally irresponsible, wasteful and spending on such “doles” (providing cash transfers and/or subsidised foodgrains) as tantamount to raising the cost of borrowing for the companies. So corporates would always say  that instead of such “wasteful” expenditure, the government better focus on improving the ease of doing business for the private sector. Many have regularly criticised even the rural job guarantee legislation (MGNREGA) as a big impediments to India’s growth story (it disincentivise the migration of cheap labour to cities and big industries). The fact is, if this additional spending is funded via fresh money being printed, it will keep the interest rates, which the companies pay when they borrow money from the market, low.
• So why ask for printing of notes: Corporates realise that if, instead of printing fresh currency, the government were to spend this money by borrowing Rs 3 lakh crore from the market, then the resulting competition (for investible funds) between the government and the private sector firms will drive up the interest rates that the companies will have to pay. But printing fresh money can lead to inflation, and India already has high inflation (which hits the poor the hardest). Evidence is clear that India is now in a “K-shaped” recovery where listed firms (blue-chip companies) registered upwards of 20% profits in the FY 21 while most of the small and medium firms, unlisted ones, have shut down or are struggling to stay afloat. A key reason for high unemployment over the past year was that big firms fired employees to cut costs and, in the process, raised profits even in a year when widespread lockdown resulted in a sharp decline in production and sales.
• Summary: Wealth inequalities have now skyrocketed in India. Even as millions of middle class are being pushed into poverty, those already below the poverty line are pushed further down. But India has also become the country with the third-highest number of billionaires in the world. Forbes estimates suggest that the five richest Indians are now worth an estimated Rs 14 lakh crore ($191 billion).

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