As the world grapples with an unprecedented healthcare crisis, with over a third of the global population in some kind of a quarantine, it is not surprising that economic growth has been paralysed. All nations have been rolling out massive fiscal and monetary stimuli to help their economies in the ongoing turbulence, amounting to almost 10 per cent of the GDPs, in some instances.

As the pressure mounts on the Indian government to announce the next tranche of fiscal stimulus, the question of funding the expenses related to Covid-19 also gains prominence. India has adopted one of the most severe forms of mass quarantine, locking down the country for 40 days from March 25, 2020, in a bid to contain the pandemic.

With only about a third of the Indian economy still functional, there is urgent need to get money and food to large swathes of labourers in unorganised sectors, self-employed, micro enterprises, and so on. The Centre has so far not bitten the bullet, in announcing monetisation of its deficit. But it may eventually have to do so.

Dropping money from above

Along with conventional methods of raising funds for this crisis, some unconventional tools such as ‘helicopter money’ and Modern Monetary Theory are also increasingly being suggested. These methods however should be used only as a last resort. Modern Monetary Theory, supported by economists such as Stephanie Kelton, L Randall Wray, Bill Mitchell and Warren Mosler, states that countries that have the sovereign right to print their own currency can never run out of money and default. A default would have to mean that they do not have any more money to pay their creditors. But this can never be the case as long as countries are free to print as much money as they want.

‘Helicopter money’ postulated by Friedman in an essay in 1969, is similar to MMT and argues that central bankers should drop cash from helicopters straight into the hands of the citizens in order to spur inflation. This money remains in their hands, and is never pulled away. Ben Bernanke has referred to this concept in couple of his speeches, giving it some weight.

Both MMT and ‘Helicopter money’, in their original forms, are seldom put in use. The more popular method of infusing liquidity, including in India, is quantitative easing, where central banks purchase government or other securities from the secondary market.

How does helicopter money work? The central bank prints money and gives it to the Centre for distribution to individuals or corporates, directly as cash or as tax cuts. Money can be transferred to the government as the central bank buys primary issuances of government bonds. But this method can work best in an extremely low interest environment. Also, it will increase government debt.

But proponents of the helicopter money theory explain that since the central bank is but an arm of the government, when the balance sheets of the government and the central bank are consolidated, the bonds held by the central bank on the asset side will be cancelled by the same bonds held on the liability side of the government. Also, the future cash flows to the government through higher tax revenue, with demand getting stimulated, will enable it to repay the debt.

Money transfer to the Centre can also happen by directly crediting the government’s account with the central bank by using the central bank’s existing reserves or equity. There are many supporters for this route of money transfer as well.

While advanced economies are not using helicopter money in the original sense as most of their liquidity infusion is through secondary market, they are printing money to buy these securities. The US Federal Reserve’s balance sheet has bloated from $4.17 trillion on February 24, 2020 to $6.37 trillion currently. The trouble the Fed had to undergo in offloading the securities purchased in earlier rounds of QE implies that the Fed’s stimulus is quite similar to helicopter money.

The problems

One of the primary concerns with the helicopter money is that it causes inflation. This problem may not arise in the current scenario where demand is at its nadir with individuals postponing their discretionary purchases, capex plans postponed for at least a year and government likely to use money reserved for capital expenditure on healthcare spends. With credit growth also slackening, the threat of inflationary effect from this method could be minimal.

The bigger problem, however, is the impact it can have on currency value. Typically, advanced economies such as the US, Canada and the EU are better placed to print unlimited quantities of money to fund expenditure. This is because they have hard currencies that are widely used to settle international transactions and hence are in demand. There is likely to be an impact on the rupee if the Centre uses this means. The fact that the foreign portfolio investors have already been pulling money out of Indian debt securities, could weigh on the Centre’s mind.

Other conventional tools

The Centre has been quite cautious about its expenditure in this crisis. It has taken the initial measure of providing food to all needy families and distributing ₹1,000 to poor senior citizens, widows and disabled and ₹500 per month to women Jan Dhan account-holders. This will, however, not replenish the income lost through the lockdown. According to estimates of various research outfits, the cost of the entire lockdown up to May 3 could be ₹11-12 lakh crore amounting to around 6 per cent of nominal GVA. The RBI has announced a series of measures to reduce the burden on businesses and individuals in repaying their loans, providing liquidity targeted at infusing funds to NBFCs, MFIs and other corporates, making available funds to banks by reducing the statutory reserve requirements and so on.

The problem with RBI’s liquidity infusion is that it depends on banks to borrow money from it to lend to distressed businesses. Given the state of bank balance sheets and the level of risk aversion in this sector, they are unlikely to toe the line.

It’s obvious that more money needs to be distributed to poorer households that have lost their livelihood in the lockdown period. Interest rate subventions are required for loans taken by smaller businesses and individuals, besides the moratorium. Besides relaxation in filing tax returns, taxes need to be waived for individuals and corporates that need it.

To fund the above, the Centre could continue with conventional tools such as front-loading cash handouts, cutting government expenditure under other heads, using unclaimed balances under various heads and borrowing more from the markets. But it may ultimately have to go for deficit monetisation.

While helicopter money may not be used just yet, the Centre will look closely at all other available means.

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