When the government is required to increase its expenditure beyond budgetary allocation in view of a crisis situation, the central bank has the option of printing more money to support the additional liquidity requirement. ADDITIONAL CASH PRINTING The process of spending more money by a government, known as deficit financing, can be achieved by borrowing or minting more money to increase liquidity in the economy.
While Banerjee said that the additional cash printing will help in direct cash transfers to poorer sections of the society, Chidambaram said the government should “act boldly and spend” by borrowing or printing more money. Nobel laureate Abhijit Banerjee and former finance minister P Chidamabaram also suggested that printing money is an ideal way to support expenditure during the ongoing second wave of the pandemic.
“This is not the time to worry about the fiscal deficit. So what if the deficit widens to 6.5%? We can’t lose another year like we lost the last year. But the way the government is reacting, we are going to lose another year. My advice to the government is to act boldly and spend. Borrow or print money and spend,” Chidambaram said. Some individuals have called for more cash printing including billionaire banker Uday Kotak. He said, “This is the time to expand the balance sheet of the government, duly supported by the RBI… for monetary expansion or printing of money.”
Simply put, the problem with printing money for emerging and poorer economies is a sharp rise in inflation — something that could cause more harm than good. Another problem with printing more money is a decline in currency value due to higher inflation. However, it is not always a harmful prospect. For instance, additional money printing is a strategy that many developed nations adapt to fight a recession. The US has done it during the Coronavirus pandemic to make credit easily available at lower interest rates. But it has also expressed the need to gradually taper the additional stimulus in view of upside risk to inflation. While additional money printing is likely to increase the demand for goods and services, it may lead to a sharp rise in inflation if the economic output fails to support demand. In turn, there will be a sharp increase in prices of existing goods and services as the demand will rise, but supply won’t.
Read | Breaking News:How Covid-19 battered Indian economy during 2nd wave The central bank has various options to increase liquidity, but it may not be a viable solution as it will not lead to a rise in economic output.
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