The economy is in a deep hole, having contracted by one-fourth in the first three months of the lockdown. Hopefully the speed of contraction is slowing, but we will be lucky to see positive growth of the economy before December. So what is to be done? Everyone is crying hoarse for a fiscal stimulus. There are many suggestions. Most of them involve distributing cash from the central treasury. We may need around 5 per cent of the GDP, i.e. nearly Rs 10 lakh crore. But the central government says we don’t have that much to spare. The coffers are running empty, since tax collection has fallen steeply. Why not borrow? The government is already neck deep in debt, and its debt mountain is so huge, that merely paying interest on past debt costs it Rs 6 lakh crore annually. There is such a thing called sustainable debt, beyond which it is simply not affordable.
For an average person the debt that you take on depends on how much EMI you can afford. Similar logic applies to government too. But surely they can ask the Reserve Bank of India to print money, and then distribute it to everyone’s Jan Dhan Yojana account? Not quite. Such automatic ‘monetisation’ of government debt has been prohibited by a contract that it signed with the RBI back in 1997. If that prohibition is not in place then it is tempting to all governments who get elected to use this ‘easy’ option of printing money to finance the deficit. Reckless use of monetisation will simply result in hyperinflation.