Deficit Financing: No plan to print extra money, says FM

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July 27, 2021 4:45 AM

Says judicious mix of supply- and demand-side measures to balance growth-inflation dynamics and support long-lasting growth

The government must remain open-minded and flexible if it wants to meet its ambitious target.The government must remain open-minded and flexible if it wants to meet its ambitious target.

Finance minister Nirmala Sitharaman said on Monday the government doesn’t intend to go for direct monetisation of its fiscal deficit by the central bank in light of the unprecedented Covid-19 outbreak.

Responding to a question in the Lok Sabha on “whether there is any plan to print currency to tide over the crisis”, the minister replied in the negative.

The minister’s written reply reflects the convergence between the government and the Reserve Bank of India (RBI) on the critical issue of printing additional currency notes to directly fund the deficit.

In an interview to FE earlier this month, RBI governor Shaktikanta Das stressed direct deficit monetisation was fraught with several risks. It “is out of sync with the economic reforms being undertaken; it is also in conflict with the FRBM law”, he said.

Last year, some analysts had advocated this option for the government to garner adequate resources to roll out fiscal stimulus aggressively, arguing that faltering revenue collection had impaired the Centre’s ability to soften the Covid blow. Of course, some others had cautioned against the move as well.

The Centre’s fiscal deficit zoomed to 9.3% of GDP last fiscal, as the government had to roll out relief packages despite a drop in revenue mop-up. The deficit is budgetted at 6.8% for FY22 but given the damage unleashed by the second wave, the target may be breached, at least by a small margin.

Sitharaman asserted that the fundamentals of the economy “remain strong as gradual scaling back of lockdowns, along with the astute support of Atmanirbhar Bharat Mission, has placed the economy firmly on the path of recovery from the second half of FY2020-21”.

The minister had earlier said that the total relief steps taken in FY21 were worth Rs 29.87 lakh crore (15% of GDP), which included measures worth Rs 12.71 lakh crore initiated by the RBI.

The Budget for FY22, too, announced a raft of measures to support “broad-based and inclusive economic development”, the minister said in a separate reply. These include a 34.5% increase in capital expenditure (from the budget estimate for FY21) and 137%jump in healthcare expenditure, she added.

On June 28, the government again announced a Rs 6.29-lakh-crore package to mitigate the impact of the second wave and prepare health infrastructure to respond to any future onslaught. The net fiscal impact of this package is to the tune of Rs 1.33 lakh crore in FY22, according to Nomura, and a sizable chunk of it (Rs 2.68 lakh crore) comprises credit guarantee.

Replying to a question on inflation risks, Sitharaman stressed that the government has undertaken “a judicious mix of both supply side and demand side measures in a calibrated manner to balance growth-inflation dynamics and support long-lasting growth”.

According to the Monetary Policy Committee’s resolution in June, inflationary pressures are expected to be mitigated by a normal south-west monsoon, comfortable buffer stocks, recent supply-side interventions in pulses and oilseeds market, declining caseload of Covid-19 and gradual easing of movement restriction across states.

Retail inflation unexpectedly dropped a tad in June to 6.26% from a six-month high of 6.30% in May but still stayed above the RBI’s tolerance level for a second straight month, as price pressure remains elevated across food and fuel segments.

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