RBI should not print money to finance fiscal deficit: Pinaki Chakraborty

RBI should not print money to finance fiscal deficit: Pinaki Chakraborty - Times of India
NEW DELHI: The RBI should not print money to finance the fiscal deficit as it will lead to fiscal profligacy, eminent economist Pinaki Chakraborty said on Sunday, expressing hope that India will see a faster economic recovery if there is no major third pandemic wave.
In an interview with, Chakraborty — the director of the National Institute of Public Finance and Policy (NIPFP) — said that high inflation is certainly a concern and there is a need to stabilize inflation to a level that is manageable.
“I think this debate started at the beginning of the pandemic and printing money for deficit financing was not considered. I don’t think the RBI should ever do that,” he noted and added that it will only “incentivize fiscal profligacy”.
“We stopped it in 1996 through a memorandum of understanding (MOU) between the RBI and the government. We should not 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 fiscal deficit. The RBI’s monetization of fiscal deficit means the central bank printing currency for the government to take care of any emergency spending to bridge its fiscal deficit.
Chakraborty said that India’s current macroeconomic situation is certainly better than what it was during the first wave of the Covid-19 pandemic.
“Going forward, we should see a faster economic recovery if there is no major third Covid-19 wave,” the eminent economist said.
Asked whether he is in favor of cash bailouts for those who lost jobs during the pandemic, Chakraborty said, “We really cannot insulate the employment cycle from an economic contraction. Faster recovery is the key to enhance employment.”
At the same time, the support provided through fiscal measures should provide some livelihood security in the short run, he argued.
To a query on the fiscal impact of the government’s all stimulus measures, Chakraborty noted that the purpose of the stimulus is to revive the economy.
“It is important to understand the sectoral nature of stimulus rather than whether it is given through budgets or other means,” he said adding that as far as the budgetary stimulus is concerned, there has also been an increase in fiscal deficit to the extent of 9.5% of GDP in the last fiscal.
Chakraborty said, “If you take state governments’ fiscal deficit, this will also be around 4.5 percent of their SGDP, so together we are talking about 14-15% of GDP, as a deficit, we are talking about 90 percent debt to GDP ratio.”
According to the NIPFP director, so the fiscal headroom for increasing expenditure is limited.
“It is not the quantum of fiscal stimulus alone. You should look at the overall thrust of the aggregate stimulus provided by the government and how it has been designed to navigate the crisis,” he asserted.
Last week, Finance Minister Nirmala Sitharaman had announced Rs 1.5 lakh crore of additional credit for small and medium businesses, more funds for the healthcare sector, loans to tourism agencies and guides, and waiver of visa fees for foreign tourists as part of a package to support the pandemic-hit economy.
The support measures were announced as states start lifting restrictions after new coronavirus infections showed a decline. The economy seems to be on a recovery path after being hit by a devastating second wave of infections that was dubbed as the world’s worst Covid-19 surge.
The Aatmanirbhar Bharat package announced by the government in 2020 to perk up the economy was estimated to be about Rs 27.1 lakh crore, which amounts to more than 13 percent of GDP. This also includes liquidity measures announced by the RBI.
On high inflation, Chakraborty said it has reached a level that is certainly a challenge that needs to be tackled in the next few months.
“If we are talking about contraction in the economy, also job losses and increase in inflation, it would have adverse distributional consequences… so inflation is certainly a worry and we need to stabilize inflation to a level which is manageable,” he noted.
Asked whether the Union and state governments should reduce taxes on petroleum products as the crude prices are hardening in recent times, Chakraborty said the reduction in taxes on petrol and diesel would also mean a larger increase in the deficit of the Centre and state governments.
“It is a complex issue of fiscal management, macro-management, and inflation management. To say that you just reduce it because the prices have gone up also would mean that you would be borrowing more to finance your deficit,” he said.
Petrol price has crossed the Rs 100 per-liter mark in several states, diesel too is being sold above Rs 100 a liter in some parts of states like 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 rates of petrol and diesel daily based on the average price of benchmark fuel in the international market in the preceding 15 days, and foreign exchange rates.
International oil prices have climbed in recent weeks on optimism of a quick recovery in fuel demand. Brent crude touched the $75 per barrel mark, the first time since April 2019.

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