RBI Shouldn’t Print Money to Fund Budget Deficit, Leading Economist Says



In an interview with PTI, Chakraborty – the director of the National Institute of Finance and Public Policy (NIPFP) – said that high inflation is certainly a concern and that there is a need to stabilize inflation at a level manageable.

“I think this debate started at the start of the pandemic and printing money for deficit financing was not considered. I don’t think the RBI should ever do this,” he said. he noted and added that this would only “encourage fiscal debauchery”.

“We stopped it in 1996 through a memorandum of understanding between the RBI and the government. We shouldn’t go back to it again,” he said. There have been calls from various quarters recently that the central bank should print money to finance the budget deficit. The RBI’s monetization of the budget deficit means that the central bank prints the currency for the government to deal with any emergency spending to close its budget deficit.

Chakraborty said India’s current macroeconomic situation is certainly better than it was during the first wave of the COVID-19 pandemic.

“In the future, we should see a faster economic recovery if there is no third major wave of COVID-19,” said the eminent economist.

When asked if he was in favor of cash bailouts for those who lost their jobs during the pandemic, Chakraborty said: “We really can’t isolate the employment cycle from an economic contraction. A faster recovery is the key to improving employment. “

At the same time, support provided through fiscal measures should ensure some short-term livelihood security, he argued.

When asked about the fiscal impact of all government stimulus measures, Chakraborty noted that the purpose of the stimulus is to jumpstart the economy.

“It is important to understand the sectoral nature of the stimulus rather than whether it is given through budgets or other means,” he said, adding that when it comes to fiscal stimulus, there was also an increase in the budget deficit of 9.5%. percent of GDP in the last fiscal year.

Chakraborty said: “If you take the state governments’ budget deficit, it will also be about 4.5% of their SGDP, so together we are talking about 14-15% of GDP, as a deficit we are talking about 90% of GDP. % of debt. to GDP. “

According to the director of the NIPFP, the budgetary margin to increase spending is therefore limited.

“It’s not just about the amount of fiscal stimulus. You should look at the overall direction of the overall stimulus provided by the government and how it has been designed to weather the crisis,” he said. .

Last week, Finance Minister Nirmala Sitharaman announced 1.5 lakh crore of additional credit for small and medium-sized businesses, more funds for the health sector, loans to tourist agencies and guides, and the exemption of visa fees for foreign tourists under a program to support the economy affected by the pandemic.

The support measures were announced as states begin to lift restrictions after new coronavirus infections showed a decline. The economy appears to be on the road to recovery after being hit by a devastating second wave of infections that has been dubbed the world’s worst wave of Covid-19.

The Aatmanirbhar Bharat package announced by the government in 2020 to revive the economy was estimated at around 27.1 lakh crore, which is over 13% of GDP. This also includes the liquidity measures announced by the RBI.

Regarding high inflation, Chakraborty said that it has reached a level which is certainly a challenge that must be addressed in the coming months.

“If we’re talking about shrinking the economy, losing jobs and increasing inflation, that would have negative distributive consequences… so inflation is definitely a concern and we need to stabilize inflation at a level manageable, ”he noted. .

Asked whether the Union and state governments should cut taxes on petroleum products as crude prices have tightened in recent times, Chakraborty said the reduction in taxes on gasoline and diesel would also lead to a greater increase in the deficit of the Center and of the state governments.

“It’s a complex question of budget management, macroeconomic management and inflation management. Saying that you are reducing it just because prices have gone up would also mean that you would borrow more to finance your deficit,” he said. he declares.

The price of gasoline has crossed the 100 per liter in several states, diesel is also sold above 100 per liter in parts of states such as Rajasthan and Madhya Pradesh.

Currently, the central government levies a fixed rate of excise duty while states levy different rates of VAT.

Oil companies revise gasoline and diesel prices on a daily basis based on the average benchmark fuel price on the international market over the previous 15 days and exchange rates.

International oil prices have climbed in recent weeks amid optimism of a rapid recovery in fuel demand. Brent crude hit the $ 75 per barrel mark, the first time since April 2019. PTI BKS MKJ

This story was posted from a feed with no text editing.

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