Printing money or IMF loan? CEA Subramanian explains India’s option to fund deficit due to Covid-19

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Published: May 13, 2020 6:00 AM

Prime Minister Narendra Modi on Tuesday announced a massive economic stimulus package worth Rs 20 lakh crore, or 10% of GDP.

Subramanian said the Centre and the states are in discussions on whether to relax the FRBM rules to allow them higher fiscal deficit limit than the mandated 3%. (File image)Subramanian said the Centre and the states are in discussions on whether to relax the FRBM rules to allow them higher fiscal deficit limit than the mandated 3%. (File image)

The government is weighing several options to finance increasing fiscal deficit in the wake of the Covid-19 crisis and asking the central bank to print more money is one of them, chief economic advisor Krishnamurthy V Subramanian told FE.

Prime Minister Narendra Modi on Tuesday announced a massive economic stimulus package worth Rs 20 lakh crore, or 10% of GDP.

However, there will be no need for the country to approach the International Monetary Fund for loans (as it had during the balance of payment crisis in the 1990s), the CEA said in an interview. While the first package addressed the vulnerable sections (mainly a demand-side measure), the next round of relief, the details of which are to be unveiled by the finance minister on Wednesday, could focus on the supply side of the economy, including the ways to boost credit flow or liquidity in the system.

Already, the central bank has initiated a raft of steps to improve liquidity in the system. The CEA has already hinted at a possible government loan guarantee to soften the blow to critical sectors like MSMEs.

Commenting on the Centre’s likely fiscal deficit in FY21, the CEA said last week’s decision to raise gross market borrowing by Rs 4.2 lakh crore to Rs 12 lakh crore alone will add 150 basis points to the Centre’s budgeted deficit level (3.5%). However, a precise forecast for the full year is difficult at this point.

Analysts have estimated the Centre’s tax revenue shortfall at Rs 2-4 lakh crore, or roughly 1-2% of GDP, in FY21. Also, the GDP growth could be flat or even negative in FY21, as against 1.5-2% estimated by CEA, many of them reckon.

Subramanian said the Centre and the states are in discussions on whether to relax the FRBM rules to allow them higher fiscal deficit limit than the mandated 3%. The fiscal plans of states, which have displayed greater discipline than the Centre in recent years, have now gone for a toss, thanks to a Covid-induced nation-wide lockdown. Even their FY20 deficit target of 2.6%, which was higher than the actual level of 2.4% in FY19, would have been breached.

He said most of the expected borrowing of $60 billion to fund a part of the fiscal deficit through listing government bonds on the global indices will flow in only in the next fiscal, and only a tiny part of it in FY21. However, this money will allow the Centre to structure its borrowing plan in a way that the cost of borrowing doesn’t pinch. In March, the Reserve Bank of India announced the opening up of key government securities to full foreign investment in a bid to find a place in global bond indices.

Asked if the elevated borrowing by the Centre will crowd out states and raise their borrowing costs, Subramanian said the yields are still at reasonable levels. The 10-year bond yield, which had dropped to 5.97% on Friday, went up 20 basis points on Monday. But this is still lower than 6.4% witnessed until recently.

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