NEW DELHI: Former RBI Governor Raghuram Rajan has suggested that the government should go in for monetization and higher fiscal deficit in a 'measured' way to protect the health of the economy in these 'abnormal times'.
The government is trying to garner resources to combat the impact of coronavirus on the economy and the Finance Ministry on Friday decided to raise market borrowing programme by 54 per cent to Rs 12 lakh crore for 2020-21, up from Rs 7.8 lakh crore estimated in February.
Monetization, which is loosely referred to printing of currency by the Reserve Bank, need not be a constraint on government spending, Rajan said in a blog, adding, "government should be concerned about protecting the health of the economy and should spend what is needed". However, he added that efforts should be made to prioritise expenditure and cut back unneeded spending.
As regards fiscal deficit, which will go up on higher spending and lower revenue, Rajan said the government "should also worry about getting the fiscal deficit and its debt back in shape over the medium term, and the more it spends now, the harder that will be".
"However, its inability to finance itself or fears of monetization should not be a constraint. Monetization will neither be a game-changer nor a catastrophe, if done in a measured way. In fact, India is already doing it! However, the caveat -- it should be measured -- is key," he said.
In the blog titled 'Monetization: Neither Game Changer nor Catastrophe in Abnormal Times', Rajan said there is a lot of concern in some quarters about central banks printing money to finance large budget deficits, while in other quarters, the concern is that central banks are doing too little of it.
"..so called monetization is neither a game changer in stressed times nor a catastrophe. It helps a little at the margin, but does not solve the government's fiscal problems nor does it lead to runaway inflation. If used in the wrong way, it could however be problematic," he said.
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He said that direct RBI financing is sometimes loosely termed money printing and thought to be free. "This is misleading. As we have seen, the government finances itself from the RBI, and the RBI finances itself from the banks at the reverse repo rate of 3.75 per cent," Rajan, who is is currently working as a professor at the University of Chicago, said.
He also pointed out that the larger government spending will directly ignite demand. However, he said that "in abnormal times when demand is depressed and the environment is disinflationary, this should not be a central worry".