The above is news from Indian Express. The article talks about | ECONOMY by VIVEK SINGH

The above is news from Indian Express. The article talks about printing of Rs. 3 lakh crore extra cash (by RBI) and giving it to Govt. which Govt. can spend in the economy to increase the purchasing power of the poor people which will ultimately increase demand in the economy and supply and will help in moving the economy. The following are some relevant points.

1) When Govt. will directly borrow from RBI then RBI will print extra cash and give it to Govt. and Govt. will have to issue/give securities/bonds to RBI. The cash which RBI prints is a liability on RBI but the Govt. securities which RBI will get, is asset for RBI. So, when RBI prints additional Rs. 3 lakh crore cash and give it to Govt. then RBI's liability (represented by cash) will increase by an amount of Rs. 3 lakh crore and RBI's assets will also increase by Rs. 3 lakh crore represented by Govt. bonds/securities.

2) This practise was prevalent before 1997 but in 1997 an Agreement was signed between Govt. of India and RBI and this practise was stopped. And this has also been included in the Fiscal Responsibility and Budget Management (FRBM) Act 2003. But FRBM Act 2003 allows direct borrowing by Govt. from RBI (printing cash) in EXCEPTIONAL circumstances. And covid is such an exceptional circumstances.

3) But economists do not favour this step as in the past successive governments have exploited this measure to spend wastefully in the economy. For example, when Govt. wanted money it asked RBI to print and took this money at less than the prevailing market interest, almost for free. When the time came to return money to RBI, then Govt. further borrowed money from RBI and this way it used to go on. This led to pumping of extra money into the economy leading to high inflation.

When Govt. borrows from the market it needs to pay market interest rate and return the money timely, so there is a pressure on govt. to spend money properly and return it with interest.

4) An argument in favour of printing cash is.............. this will not increase the market interest rate. This is true but it depends on the situation of the economy. If the economy/banks have less funds and then govt. borrows from the market and spends then it may lead to higher interest rate for the private sector (called crowding out) and it will make their business investment costly. But this may not be the situation presently, as RBI is providing enough liquidity in the economy through various tools.

5) Its good idea to provide cash to the poor to support them because of the loss of their livelihoods and to revive the economy but Govt. can use other fiscal tools for that.

The measures which have been suggested for fiscal stimulus are:

(a) Compressing pay ratios: Few Corporates sector are already doing that
(b) Wealth Tax: Earlier Govt. used to levy this tax, but 4/5 years back Central Govt. abolished wealth tax because the administration (collection) was quite difficult because of valuation of wealth is quite difficult like land, building etc. and leads to litigation
(c) Inheritance tax: It can be levied
(d) Front loading of capital expenditure: this means Govt. should spend more on capital expenditure early in the Financial Year as soon as possible.........it will help in reviving economy and Gov.t is already doing that.