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If government runs huge deficit to tackle crisis and asks RBI to monetise part of it, so be it

India should and can come out of the present crisis with as little damage as possible if we tackle it together.

Written by Yashwant Sinha | Updated: April 11, 2020 8:06:11 am
Easing lockdown, how, when, where: Ministers explore steps post-April 14 The banks and other financial institutions will have to be provided with resources to help the private sector, specially the agricultural and MSME sectors. (Express photo by Vishal Srivastav)

We have abided by the advice of the prime minister; observed the Janata Curfew; clapped our hands and utensils; followed the lockdown and lighted the diyas. It is a moot question whether the government has done all that it should have in the meanwhile and at the right time. We shall postpone these questions for the future because the need of the hour is to fight the disease together and with all our might. The purpose of this article is to talk about management of the aftermath.

Everyone is agreed that the whole world is hurtling towards an unprecedented economic recession. India, already facing a massive slowdown, is going to get hurt perhaps more than the others, because our economic immune system is already weak. What should we do in the given situation?

The first is containing the spread of the virus. Apart from the manpower, medicines, protective equipment for frontline workers and other methods, it will need massive resources to tackle it. Second, the poor are already suffering in more ways than one, including the daily wage earners. They will have to be taken care of, again needing massive resources. And third, economic activity will have to be revived as soon as conditions return to normal or near-normal, for which businesses will have to be helped, again needing massive resources; both in terms of revenue foregone and actual cash outgo. The question, therefore, on everyone’s mind is how much money will be needed for all this and where will it come from? What the government and the RBI have done so far is clearly awfully inadequate. Other countries have done much more. India can be no exception.

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It is difficult at this stage of the crisis to make a correct estimate of how much money will be needed and for how long. I think as a nation we must decide that India will spend whatever it takes to tide over the pandemic and its aftermath. Resources should not be allowed to be a constraint. But where will the money come from? Obviously, it will have to come from the government of India. The state governments are already short of resources and can make little contribution to this effort.

Where will the government of India get the resources? We need an expert committee to work this out. But broadly speaking, it will come partly through market borrowings and partly from the RBI. Manmohan Singh had decided in 1994 that in future the government of India would not monetise its deficit; in other words, would not borrow from the RBI but go to the money market and borrow from there. In these unprecedented times, we may take leave from that very sound principle, which all governments have followed religiously since then, and borrow from the RBI. This means printing of more currency notes with all its attendant problems including inflation. Government of India will have to take the steps necessary to tackle the after-effects to the extent possible. It must ensure that the supply chains work smoothly.

I am making this suggestion with the fullest sense of responsibility. After all, I am guilty of imposing on the country the Fiscal Responsibility and Budget Management Act. I am today publicly declaring that I shall have no problem if the government of India runs a huge deficit to tackle the present crisis and asks the RBI to monetise a part of it.

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The more important issue, however, is — how will the money be spent and efficiently. Clearly, the states will have to play a very important role in this, as much of the work will have to be done by them. I have already tweeted that since the finance commission continues to be in existence and has a clear idea of the state finances, it should be immediately tasked with the responsibility of discussing this matter with the state governments and making its recommendations available within a period of one month. The task force under the finance minister could work out the needs of businesses and the government of India both in the short as well as the medium term.

The more important question which remains is of properly and efficiently spending this money. Obviously, it should not be wasted and each rupee spent creates its own multiplier effect. Our system leaves much to be desired. And the moment it is known that funding is not a constraint, the system can go berserk. We must guard against that and ensure that rules are in place, specially at the field level to ensure the proper use of resources. During the Bihar famine of 1967, we as district collectors were required to get as many kutcha wells dug as possible. The payment was to be made based on the depth and width of the well. It was a simple formula and the payments made could be easily verified. The methodology adopted for the construction of quality roads under the Pradhan Mantri Gram Sadak Yojana is also a good guide. We can devise even better methods with all the technology that is available to us today.

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The banks and other financial institutions will have to be provided with resources to help the private sector, specially the agricultural and MSME sectors. In the rural areas, we must ensure that durable assets are created out of the funds made available. The rules governing the

MGNREGA scheme should be tweaked to the extent necessary in order to ensure that more material than labour is used wherever necessary.

India should and can come out of the present crisis with as little damage as possible if we tackle it together. The battle is already lost if some of us decide to use the crisis for personal projection or for serving petty selfish interests. We cannot control what happens in other countries, but we can surely learn from them and adopt their best practices. We must also play our role in defining the new global order because the world is more intertwined now than ever before.

This article first appeared in the print edition of March 11 under the name ‘A plan for the aftermath’. The writer is a former finance minister

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