A Dangerous Crossroad

Printing money to fund crisis measures is not without risk; countries like the US might get away with it, but the price for excess is always greater for a developing country, writes T N Ninan

Everyone now wants the government to do more: More relief measures for up to 100 million people who have lost their livelihoods, revival packages for businesses, financial help to states, more spending on public health, and so on. The experts are also coming around to near-unanimity on how to finance all this. Since there is no fiscal headroom, simply print money and spend it on the poor and to save troubled businesses. The usual price to be paid for what would be considered highly irresponsible behaviour in normal circumstances is inflation, or a foreign exchange crisis (such as happened in 1991), or both. Both, especially the latter, are considered low risks today because of low oil prices and comfortable reserves. As for normal circumstances, they are anything but normal just now.

How much money is required? No one can know for sure, but the starting point for arriving at a number must be the view that the International Monetary Fund is way off the mark in its forecast that economic growth for India this year will be 1.9 per cent. The reason for scepticism is that the Fund has a long history of optimistic forecasts that are then corrected downwards. This year looks to be no different. There is a definite possibility that, far from recording growth, the Indian economy will shrink this year. Consider that about half of what constitutes the gross domestic product (GDP) is hors de combat, so to speak: manufacturing, construction, transport and trade, the financial sector on the lending side, and the entertainment/hospitality businesses. The numbers for March show electricity consumption is down 25 per cent, unemployment has trebled to 24 per cent, and exports are down 35 per cent. These numbers speak of devastation. Finally, bear in mind that China has just reported 6.8 per cent shrinkage of GDP for the latest quarter. In such circumstances, we should be surprised if India records growth.

The fiscal point of this is that the tax base will get sharply eroded just when the demands on the government have grown. The governments at the Centre and states will be lucky to get away with a 10-15 per cent overall tax shortfall, which will mean a loss of up to Rs 5 trillion. So the fiscal deficit (properly calculated) will balloon to levels never seen in our history, certainly worse than the situation in 1990-91. If, over and above this, the government is to fund crisis measures that themselves may cost another Rs 5 trillion, there is simply no escape from printing money.

This is not without risk, because extraordinary steps taken in exceptional times have the habit of becoming habits until the next crisis intervenes. Countries like the US which now have much bigger deficits will likely get away with it, but the price for excess is always greater for a developing country than for the centres of finance. That would explain why Urjit Patel has warned against copying what the advanced economies are doing. Such conservatism is well taken but is unlikely to get much public purchase today, though the Narendra Modi government’s preference usually is to be conservative on such matters. So we are at a dangerous crossroads.

The demands being made on the Indian state had grown even before the current enthusiasm for “helicopter money” (cash payouts), support for small businesses, a government backstop for bank loans, and so on. Now the welfare state being demanded by many has acquired the status of a moral imperative, though the state will have fewer resources as the post-crisis economy goes into a painfully slow rather than quick recovery. In any case a welfare state is simply premature at a per capita income level of barely $2,000. One wishes the government would stretch the limit of possibilities and do the maximum in the current crisis. But it must be recognised that nothing will be enough. People will suffer. A relatively low-income economy going through disruption and turmoil will extract its price, and those on the margin with no reserves will pay most of it. Is there any other way? I would doubt it. To pretend otherwise would be escapism.