Is it the time to throw out the rule books on fiscal deficit and print as much money as central banks can? The US Fed has decided to buy not just treasury bills, but also corporate bonds from the primary and secondary market. Other central banks are following suit with amazing alacrity.

The Indian government, however, earlier this week announced a business as usual borrowing program, even though everyone is sure that tax collections in the current year will be nowhere near what was budgeted. More importantly, tax collections in the year that just ended on March 31, have contracted compared to FY19 leaving state and central governments with practically no money.

So, is this the time for the Reserve Bank of India (RBI) to print money and give it to the governments, or what you call monetise the deficit – buy bonds directly from the government rather than buy it from the market and support yields?

Sudipto Mundle, Distinguished Fellow at NCAER, said the RBI should not directly lend to the central government. “Since 2002 it was not just a matter of a policy choice, but there is a memorandum of understanding between the RBI and the central government under which the RBI is disallowed to directly pickup central government debt in the primary market."

"So, if you were to change back to what used to exist earlier then you would have to change that memorandum of understanding. But, since you can do open market operations (OMOs) and many other ways of enhancing liquidity apart from the RBI lending directly to government, I think those should be preferred,” he said.

However, Soumya Kanti Ghosh, Group CEA at SBI, said that under current circumstance monetisation of deficit will not be inflationary as currently there is no demand creation.

“In the past 10 days of March, there has been a significant jump by the state government borrowing, when the country went into lockdown. Around Rs 60,000 crore of money was borrowed by the state governments and that gives you the unprecedented nature of the fiscal position we are in."

"The states own revenues are going down and they are dependent on the center for GST which is also going to take a huge hit in the current fiscal and the math does not add up. So, even if you do an OMO, you will not be able to breach that huge gap and you will have to monetise the deficit to some extent,” he said.

Ajit Ranade, Group Chief Economist at Aditya Birla Group, said there could be a private placement from the government to RBI without removing MoU.

“This is very unprecedented. There is no benchmark to fall back on. We have to think about unconventional measures. We don’t need to cancel the MoU, we can treat it as a one-off thing which is a private placement. You don’t even need to do monetising the deficit, it would just be a private placement directly from the government to the RBI and provide for this liquidity and provide for funds,” he said.

He further added the government should think of clearing all pending payments including tax dues.

“Government should clear pending payments and that itself will provide some sort of a fiscal stimulus but that requires cash balances to be there with the government. So if you even just do a private placement to simply clear all pending bills then that itself will go a long way,” said Ranade.

HR Khan, Former Deputy Governor of RBI said, “Never say never in these unprecedented times, but I would suggest let us keep that deficit monetisation towards the end and not use it up immediately.”

“You have a borrowing calendar and Rs 80,000 will be borrowed this month, you have provision for cash management bill -- you can raise short term money from the market, and you have a Ways and Means Advances (WMA) of Rs 1.20 lakh crore from the state government."

"So these are the means available. So, there are money pools available here. Cash management bill is something which is immediately you can mop-up as much as you want and short-term requirement you can take,” he added.

Khan further added that LIC should be taking some amount of borrowing.

“The other issue is why people are talking about monetisation is that banks may not subscribe to the government bonds and the yields are not showing up, despite all the liquidity it is not happening."

"There are ways to handle this. One is of course we have full fledged LIC and all and they should be taking some amounts of borrowing and we have now very appropriately opened up the instrument of fully accessible route where some 3-4 securities are fully opened to the foreign investors. Maybe immediately it may not happen, but that gives a medium term path,” he explained.

First Published:Apr 3, 2020 7:17 PM IST