Deficit Financing: No plan to print extra money

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Finance minister Nirmala Sitharaman said on Monday the govt shall not choose direct monetization of its fiscal deficit by the financial institution in light of the unprecedented Covid-19 outbreak.

Responding to a question in the Lok Sabha on “Is there any decision to print currency to solve the crisis?”

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

Reserve Bank Governor Shaktikanta Das said direct deficit funding was fraught with many risks. This is not in line with economic reforms; It does not comply with FRBM rules.

Last year, some analysts argued that this feature was in favor of the government gaining sufficient resources to aggressively develop the fiscal stimulus, arguing that disrupting revenue collection would weaken the center’s ability to meet the Covid blow.

Despite declining revenues, the central fiscal deficit widened to 9.3 percent of GDP as the government had to release relief packages. The budget deficit is estimated at 6.8 percent, but considering the damage caused by the second wave, the target may exceed even a small margin.

Fundamentals of the Economy: “Gradually, LockDown continues to be strong with the support of the Atmanibhar Bharat Mission, which has led the economy on the path to recovery since the last half of the financial year.”

Earlier, the minister had announced relief measures worth Rs 29.87 lakh crore (15 percent of GDP) in the current financial year, including Rs 12.71 lakh crore initiated by the Reserve Bank.

Allow a raft FY22 of measures to support “broad and comprehensive economic development”. This includes a 34.5 percent increase in spending and a 137 percent increase in health care spending.

On June 28, the government announced a package of Rs 6.29 lakh crore to mitigate the impact of the second wave and prepare health infrastructure to respond to any future attacks. Internet fiscal impact of this package is to the tune of Rs 1.33 lakh crore in FY22, consistent with Nomura, and a large chunk of it (Rs 2.68 lakh crore) comprises a credit guarantee.

Responding to a question on inflation risk, Sitharaman stressed that “the government has taken a reasonable mix of supply-demand-side measures calibrated to balance growth-inflation dynamics and support long-term growth.”

According to the Monetary Policy Committee’s resolution in June, inflationary pressures are expected to be mitigated by a traditional southwest 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 eased to 6.26 percent in June. The six-month high in May fell to 6.26 percent from 6.6 percent in the previous month, but for the second month in a row, the Reserve Bank of India (RBI) has maintained a bearish level on rising food and fuel prices.

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