The government of India is likely to look at the option of the Reserve Bank of India (RBI) monetising the deficit in second half of the fiscal year, a senior government official has said. “It is an option which we have not closed. It is very much there,” said the official. The assessment within the government is that expenditure in the first half of the financial year would be met through the market borrowing and spending re-prioritisation for various ministries. There is an uncertainty of how long the pandemic will last and the government is not ken on rushing into any decisions so early in the financial year.
RBI’s monetisation of the fiscal deficit broadly means the central bank printing currency for the government to take care of any emergency spending and to meet bridge its fiscal deficit and this action is resorted to under emergency situations. This practice was followed in 1980s and late 1990s, where the central bank helped in funding the deficit but since then several reforms have been ushered in, including the Fiscal Responsibility and Budget Management Act (FRBM), to keep a hawk eye on the fiscal deficit and prompt governments to follow a fiscally prudent path.
The Covid-19 pandemic has had a devastating impact on revenues, both direct and indirect, due to the three-month national lockdown unveiled to stop spread of the virus. This has pushed the government to raise its full-year borrowing plan by nearly 50% to help meet its spending commitments due to the pandemic. Experts have said the move could push the fiscal deficit to 5.5% of GDP from the earlier target of 3.5%.
“It will all depend on how much borrowing the government may need to do through RBI,” said N R Bhanumurthy, professor at the National Institute of Public Finance and Policy, while responding to a question whether it would stoke inflation. He said RBI could either print money or buy government bonds from primary dealers to fund the deficit. “The government, if it resorts to monetisation, must clearly specify that it is a temporary measure and spell out its fiscal roadmap clearly,” said Bhanumurthy.
RBI governor Shaktikant Das has been quoted as saying that RBI has not taken any view on monetisation of the deficit. Former FM P Chidamabaram and other economists have backed the idea of monetisation of the deficit and have said the government should not shy away from this option.
