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Monday, July 26, 2021

ExplainSpeaking: Alternatives to the RBI printing money for a fresh Covid relief package

Can the government impose a wealth tax or a tax on inheritance to fund a fresh stimulus package for the poor?

Written by Udit Misra , Edited by Explained Desk | New Delhi |
Updated: June 27, 2021 8:26:11 am
Labourers in Kolkata. (Express Photo/Shashi Ghosh)

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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. In doing so, he was reiterating the demand by the previous CII president, Uday Kotak (Chairman of the Kotak Mahindra Bank), who finished his term in May.

According to CII, the government should spend an additional Rs 3 lakh crore. It has also suggested where this money should be spent:

— to provide direct cash transfers to families with Jan Dhan bank accounts,

— to increase MGNREGA allocation and provide more job guarantees in rural India,

— to cut the Goods and Services Tax rates, and thus boosting demand,

— to extend the Atmanirbhar Bharat Rozgar Yojana, under which the government subsidises the provident fund contributions by employees as well as employers for two years

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Apart from this direct spending of Rs 3 lakh crore, CII has also demanded that the government extends the Emergency Credit Line Guarantee Scheme (ECLGS), aimed at supporting businesses through this tough phase, to Rs 5 lakh crore.

The first question to ask is: Why is the CII repeatedly urging the government to spend money? Aren’t the fundamentals of the Indian economy quite sound according to the government and the RBI? Isn’t the Indian economy registering a “V-shaped” recovery? If so, why the repeated calls for fresh stimulus?

The answer: Yes, the recovery is on the cards but in the absence of a fresh stimulus from the government the recovery could be quite slow.

That’s because, as CII 115th Business Outlook Survey found, in the wake of the second Covid wave, a “significant majority of respondents reported infections among staff or their family”. As many as 79% of the respondents expect production/sales to be adversely impacted in the first quarter (April, May and June) of the current financial year (see the chart below).

Impact on production/sales

Already, as the chart below shows, by May 2021 all sectors tracked by CII were showing considerable moderation (note the red colour).

Sectors tracked by CII were showing considerable moderation

CII is also concerned about people losing jobs (see the chart below) in the aftermath of the second Covid wave and how this loss of livelihood and income could be bringing down the overall demand.

Unemployment rate

In sum, both production (or supply) and consumption (or demand) of goods and services are likely to be depressed in the coming period unless the government transfers money, one way or another, into the hands of the people.

As such, while it is true that India’s GDP will grow in the coming years, CII suspects the GDP growth rate could vary widely between 5% per year and 9% per year (the chart below) depending on several factors such as fresh stimulus, new reforms, and the state of the global economy.

Real GDP of 2019-20 indexed to 100

The second question is: Where will the additional Rs 3 lakh crore come from?

The government’s finances are already quite stretched. The fiscal deficit, which maps the level of borrowings the government has to undertake just to meet the gap between its spending and revenues, is already more than twice the prudential norms set by the Fiscal Responsibility and Budget Management Act.

In response, the new 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.

This is quite an unprecedented demand from the captains of Indian industry.


Historically, corporate India has always viewed additional spending of this nature as fiscally irresponsible. Such expenditures have been described as wasteful and it has been argued that when the government borrows money from the market to spend on such “doles” (providing cash transfers and/or subsidised foodgrains), it raises the cost of borrowing for the companies. It was argued that instead of such “wasteful” expenditure, the Indian government should focus on improving the ease of doing business for the private sector.

Beyond ruining government finances, many in the industry have argued that supporting the poor through schemes like the rural job guarantee legislation (MGNREGA) are the biggest impediments to India’s growth story. That such schemes disincentivise the migration of cheap labour to cities and big industries. Others have characterised providing cash transfers and/or subsidised foodgrains as “doles” that made Indians “lazy” and kept them poor.

What is even more interesting than the suggestion for the government to spend more, is the manner in which the government is expected to fund this additional spending. Even civil society activists and so-called left-leaning economists have stayed away from asking such social safety nets to be funded through the printing of fresh cash.

In this respect, it is significant why CII prefers RBI to print money: “so that lending costs remain contained”.

The fact is, if this additional spending is funded via fresh money being printed, it will keep the interest rates, which the companies pay when they borrow money from the market, low.

If instead of printing fresh currency, the government were to spend this money by borrowing Rs 3 lakh crore from the market, then the resulting competition (for investible funds) between the government and the private sector firms will drive up the interest rates that the companies will have to pay.

Notwithstanding the oddity of India’s business class asking for more welfare spending and that too financed by printing fresh currency, the next question is: Can the government and the RBI print fresh cash? And if so, should it be done?

The short answer is: Yes, it can but it is not advisable. Here’s a detailed explainer about the risks of RBI printing money to bridge the government’s fiscal deficit. In a nutshell, printing money can lead to inflation. India already has high inflation and, as such, this suggestion is problematic. More so, because inflation hits the poor the hardest.

But that does not mean that India’s poor do not need additional support. Far from it. Almost all evidence suggests that India has been witnessing a “K-shaped” recovery wherein firms listed in the stock markets, the so-called blue-chip companies, registered upwards of 20% profits in the last financial year while most of the small and medium firms, all unlisted, have either closed down or are struggling to stay afloat.

In fact, one key reason for high unemployment over the past year has been that big firms fired employees to cut costs and, in the process, raised profits even in a year when widespread lockdown resulted in a sharp decline in production and sales.

Not surprisingly, since Covid hit, wealth inequalities have skyrocketed in India. While on the one hand, millions of middle class have been pushed into poverty even as those already below the poverty line are pushed further down, India has also become the country with the third-highest number of billionaires in the world. According to Forbes estimates, just the five richest Indians, which includes Kotak, are together worth an estimated Rs 14 lakh crore ($191 billion).

Are there any alternatives to printing money?

There are several alternatives.

Compressing “pay ratios” in the corporate world

This is a solution that does not involve the government at all and follows the notion that charity begins at home. Since the big corporate firms in India have acknowledged the depth of financial distress in the broader economy, one simple way to alleviate stress would be to leave its own staff with more money.

This can be done by compressing the pay ratio in every firm. 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 — half the number of employees earn less than this level and half of them earn more. So if in a firm, which employs 100 people from the janitor to CEO, the median salary is Rs 5 lakh per annum then it means 50 people earn less than Rs 5 lakh. If in such a firm, the CEO earns Rs 25 lakhs then the pay ratio would be 5.

But in real life India, pay ratios are quite high. An analysis of the pay ratios in the 42 private companies that were part of the NIFTY50 list for 2019-20, found the following results (See the table below).

TABLE: High pay ratios in private NIFTY50 companies

Company Person Pay ratio
Hero Motocorp Pawan Munjal 752
Shree Cements H.M. Bangur 659.8
Tech Mahindra C.P. Gurnani 618.46
Bajaj Auto Rajiv Bajaj 600
JSW Steel Sajjan Jindal 581
Hindalco Inds. Satish Pai 520.56
Infosys Salil Parikh 502
Wipro Abidali Neemuchwala 495
Bharti Airtel Sunil Bharti Mittal 428.94
Eicher Motors Vinod K. Dasari 398.8
Cipla Umang Vohra 378
Bajaj Finance Rajeev Jain 373.22
Larsen & Toubro S.N. Subrahmanyan 316.85
Brittania Inds. Varun Berry 288.79
Dr Reddy’s Laboratories G.V. Prasad 283
HDFC Bank Aditya Puri 282
UPL Rajnikant Shroff 235
UltraTech Cement K.K. Maheshwari 217.22
TCS Rajesh Gopinathan 214.65
Tata Motors Guenter Butscheck 198.77
Grasim Inds. Dilip Gaur 169.63
ITC S. Puri 168
Asian Paints KBS Anand 160.96
Hindustan Unilever Sanjiv Mehta 151
Nestle India Suresh Narayanan 140
Adani Ports SEZ Malay Mahadevia 134.4
IndusInd Bank Romesh Sobti 130
HDFC Keki M. Mistry 127
Bharti Infratel Akhil Gupta 124.98
Sun Pharma Kalyanasundaram Subramanian 121.86
M&M Pawan Goenka 111.44
ICICI Bank Sandeep Bakhshi 111
Tata Steel T.V. Narendran 105.1
HDFC Life Insurance Vibha Padalkar 99.91
Axis Bank Amitabh Chaudhry 92.2
Titan Company Bhaskar Bhat 86.65
Zee Entertainment Punit Goenka 78.42
HCL Tech Shiv Nadar 46.86
Bajaj Finserv Sanjiv Bajaj 46.28
Kotak Bank Uday Kotak 42.68
Maruti Suzuki Kenichi Ayukawa 39.07
RIL Nikhil & Hital Meswani Not reported


Reetika Khera, associate professor at IIT-Delhi and one of the authors (the other is Meghna Yadav of J-Pal South Asia) of this analysis that was published in Ideas for India, points out that companies can simply choose to compress such high pay ratios instead of firing employees. Incidentally, these are the firms that have benefitted the most from the unrelenting rally in the stock market.

Wealth Tax

In a piece published in a book titled “We The People”, 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.

Of this amount, the top 1% owns 58% or around Rs 330 lakh crore. Patnaik and Ghosh point out that a 2% tax on the wealth of just the top 1% would fetch Rs 6.6 lakh crore.

Inheritance Tax

In the same light, Patnaik and Ghosh argue that “if we assume that every year 5% of the total wealth of this 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”.

The question then is: Why can’t any of this be done?

As far a compressing pay ratio is concerned, that is for the companies to decide and the government cannot do anything.

On wealth tax, Pronab Sen, former Chief Statistician of India, points out that administration of a wealth tax is utterly cumbersome. That’s because the valuation of wealth tends to be highly contested.

“How does one value a house? Do you take the cost or the circle rate or the market price?” he asks. “The matters become even more complicated when it comes to stocks and shares,” he points out further. If the shares are valued at one price, what happens if their price falls and they lose value?

Typically, this tax leads to a lot of litigation and it is for this reason that, says Sen, India dropped the wealth tax provision it had.

Sen also points out that, contrary to how Patnaik and Ghosh suggest, the wealth tax will not give such large sums each year. “You cannot tax the same wealth repeatedly; after the first year, the tax would only look at the change in wealth”.

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An inheritance tax is far more feasible, states Sen. He reminds that in 2012, then Finance Minister P Chidambaram had floated the idea that India should have such a tax.

But according to Sen, if the additional stimulus being demanded is just Rs 3 lakh crore then India does not need to get into the debate about printing money. “This is not such a big amount. This much money can be borrowed from the market,” says Sen, “although it will push up the interest rates.”

N R Bhanumurthy, Vice-Chancellor, Bengaluru Dr B.R. Ambedkar School of Economics (BASE) University, also argues against printing money because it would only hurt the poorest by increasing inflation.He suggests that the best thing to do for the government is to prioritise capital expenditure. Such expenditure has the highest multiplier effect — the addition to GDP for every Rs 100 spent by the government — as it creates new jobs and productive assets.

“It is for this reason Finance Minister Nirmala Sitharaman recently asked all ministries and public sector enterprises to front-load capital expenditure,” says Bhanumurthy.

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