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Govt may get RBI to monetise deficit

The Centre is likely to look at the option of the Reserve Bank of India (RBI) monetising the deficit in the second half of the financial year, a senior government official has said, asserting that the Centre is seriously examining the issue.

Last Updated: May 27, 2020, 08.46 AM IST
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(This story originally appeared in on May 27, 2020)
NEW DELHI: The Centre is likely to look at the option of the Reserve Bank of India (RBI) monetising the deficit in the second half of the financial year, a senior government official has said, asserting that the Centre is seriously examining the issue. “It is an option which we have not closed. It is very much there,” the official, who did not wish to be identified, further said.

The assessment within the government is that expenditure in the first half of the financial year would be met through market borrowing and spending re-prioritisation for various ministries. There is an uncertainty about how long the pandemic will last and the government is not keen on rushing into any decisions so early in the financial year.

The 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 bridge its fiscal deficit — 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 coronavirus. 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 the GDP from the earlier target of 3.5%.

“It will all depend on how much borrowing the government may need to do through the 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 the 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 road map clearly,” said Bhanumurthy.

RBI governor Shaktikanta Das has been quoted as saying that the RBI has not taken any view on monetisation of the deficit. Former FM P Chidambaram and other economists have backed the idea of monetisation of the deficit and have said the government should not shy away from this option.
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