Alternatives like RBI printing currency

Alternatives like RBI printing currency

Subject: Economics

Context : Last week, T V Narendran, the CEO and Managing Director of Tata Steel Limited as well as the new president of the Confederation of Indian Industry (CII), urged the government to provide a fresh fiscal stimulus to boost demand in the economy

Concept:

• CII president has yet again reiterated what the last president had suggested: Government should ask the RBI to “expand its balance-sheet in order to accommodate the increased stimulus so that lending costs remain contained”.
• In other words, CII wants the government to simply ask the RBI to print Rs 3 lakh crore worth of new cash and give it to the government to spend.

Helicopter Money

• This is an unconventional monetary policy tool aimed at bringing a flagging economy back on track.
• It involves printing large sums of money and distributing it to the public. American economist Milton Friedman coined this term.
• It basically denotes a helicopter dropping money from the sky.
• Friedman used the term to signify “unexpectedly dumping money onto a struggling economy with the intention to shock it out of a deep slump.”
• Under such a policy, a central bank “directly increases the money supply and, via the government, distributes the new cash to the population with the aim of boosting demand and inflation.”

Is helicopter money the same as quantitative easing (QE)?

• Quantitative easing involves the use of printed money by central banks to buy government bonds.
• But not everyone views the money used in QE as helicopter money.
• It sure means printing money to monetize government deficits, but the govt has to pay back for the assets that the central bank buys.
• It’s not the same as bond-buying by central banks “in which bank-owned assets are swapped for new central bank reserves.
• Helicopter money is also different from a central bank directly financing the debt of a government.

Alternatives to printing money by RBI

• The government can consider Covid bonds as an option to raise borrowing, not in addition to budgeted borrowing, but as a part of that.
• They can provide relief to savers who are short-changed by the low-interest rates on bank fixed deposits.
• Compressing “pay ratios” in the corporate world: It does not involve the government at all and follows the notion that charity begins at home.
• The pay ratio of a firm is the ratio of the salary of the top-paid manager in the firm to the median salary in the firm.
• The “median” salary means that level of salary which marks the middle point in terms of salaries i.e. half the number of employees earns less than this level and half of them earn more.
• Wealth Tax: The economists Prabhat Patnaik and Jayati Ghosh refer to the Global Wealth Migration Review (2019) that found that the total net worth of private individuals in India in 2018 was Rs 570 lakh crore.
• They pointed out that a 2% tax on the wealth of just the top 1% would fetch Rs 6.6 lakh crore.
• Inheritance Tax: It is assumed that if every year 5% of the total wealth of top startup gets transferred to their children, or other legatees, as inheritance, then even a modest taxation of one-third of such inheritance would fetch Rs 5.5 lakh crore.