‘India will see faster recovery’

Economist Pinaki Chakraborty says RBI should not print money to finance the fiscal deficit

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, 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 stabilise inflation to a level which is manageable.

“I think this debate started in 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 “incentivise fiscal profligacy”. “We stopped it in 1996 through memorandum of understanding (MOU) between the RBI and the government. We should not go back to it again,” he said.

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There have been calls from various quarters recently that the central bank should print money to finance the fiscal deficit. The RBI’s monetisation 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 pandemic. “Going forward, we should see a faster economic recovery if there is no major third wave,” the eminent economist said.

Asked whether he is in favour of cash bailouts for those who lost job 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, support provided through fiscal measures should provide some livelihood security in the short run, he argued.

To a query on the fiscal impact of 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 budgetary stimulus is concerned, there has also been an increase in fiscal deficit to the extent of 9.5 per cent of GDP in the last fiscal.

Chakraborty said, “If you take state governments’ fiscal deficit, this will also be around 4.5 per cent of their SGDP, so together we are talking about 14-15 per cent of GDP, as deficit, we are talking about 90 per cent 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.

On high inflation, Chakraborty said it has reached a level which 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 stabilise inflation to a level which is manageable,” he noted.

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