Police stop motorists after a lockdown against the spread of Covid-19 in Siliguri. India is struggling with the economic costs of the pandemic. Photo: AFP/Diptendu Duttad

As India battles the economic fallout of the second wave of Covid-19, there is now a debate whether the central bank should print new currency to help the government add much-needed liquidity to revive the stalled economy.

India had put an end to this practise in 1997 to discourage fiscal profligacy by the governments. This was done against the backdrop of a balance of payments crisis in 1991 when the then Indian government had to pledge gold at the Bank of England and Bank of Japan to finance its imports and repay debts.

The country is facing a huge demand slowdown as lockdowns have forced many companies to shed jobs and cut salaries, and many business establishments have closed. This has led to a steep fall in income and consumption.

The government faces the twin challenge of diminishing revenues, which could lead to a spiraling fiscal deficit, and of providing relief to industries and their citizens. It can either borrow money, which may push up interest rates and increase the deficit or directly monetize by printing new currency.

Former Reserve Bank of India governor D. Subbarao has said printing money should be a last resort. Subbarao told Press Trust of India, “It (RBI) can (print money) but, it should avoid doing so unless there is absolutely no alternative.

“For sure, there are times when monetization despite its costs becomes inevitable such as when the government cannot finance its deficit at reasonable rates. We are nowhere near such a scenario.”

He instead suggested that to deal with the current crisis, the government can consider Covid bonds. Instead of borrowing in the market, the government could raise a part of its borrowing requirements by issuing Covid bonds to the public.

The Reserve Bank of India headquarters in Mumbai. Photo: AFP / Indranil Mukherjee

“Appropriately priced and structured, they can provide relief to savers who are short-changed by the low-interest rates on bank fixed deposits,” he said.

However, another former central bank governor C. Rangarajan, who was instrumental in putting an end to direct monetization facility, now feels it is inevitable. He recently said that such a large increase in expenditure cannot be managed without monetization of government debt.

Leading banker and the CEO of privately held Kotak Mahindra Bank Uday Kotak had earlier called for printing of more money to help the country tide over the current slowdown. He wants the federal government to spend up to 1% of the country’s GDP for direct cash transfer to the poor to boost consumption.

“In my view, this is the time to expand the balance sheet of the government, duly supported by the RBI… for monetary expansion or printing of money,” he said in an interview with the NDTV television channel.

“The time has come for us to be doing some of that. If not now, when?”

India’s economy contracted 7.3% in the fiscal year ended March 2021. The Reserve Bank has lowered the country’s growth projection for the current financial year to 9.5% from 10.5% estimated earlier, while the World Bank has projected that India’s economy to grow at 8.3% in 2021.