Pandemic may force the government to borrow more

Pandemic may force the government to borrow more

Part of: GS Prelims and GS-III- Economy

In news

• Revenue shortfalls in India due to COVID-19 are likely to force the government to borrow more but it will only consider monetizing its deficit as a last resort. 
• Borrowing plans for the second half of the financial year will be reviewed by government and RBI officials letter September.
• The possibility of monetizing the debt has already been discussed but not yet decided. 

Key takeaways

• Earlier Government used to ‘Monetize the deficit’.
• This practise was stopped in 1997 by signing an agreement between RBI and Govt. of India. 
• This was also included in the FRBM Act 2003.
• Right now Government does not prefer deficit monetization but it can consider it as the last resort.

Do you know?

• Deficit monetization leads to extra money reaching into the economy which leads to inflation and it also may lead to ‘Sovereign Ratings’ downgrade which then hurts investments in the country.
• RBI can pump liquidity in economy through open market operation. 
• This will lead to decrease in interest rate (more money supply means less interest rate), which will basically help government in raising money from the market (‘deficit financing’ rather that ‘monetisation of deficit’) at lesser interest rate.

Important value additions

Monetising the Deficit/Monetizing the Debt/Deficit Monetization

• It means that if Government has deficit, then it will ask RBI to print notes and give it to Government and in return Government will give its Bonds to RBI. 
• So, it will be basically debt on Government.
• Actually the word ‘monetize’ has relation with currency/notes/cash.

Deficit Financing

• It generally means that Government is having deficit (expenses are more than receipts) and it will arrange for its financing of the deficit. 
• This deficit can be financed from market borrowing or borrowing from abroad or Government may ask RBI to finance its deficit by printing more money. 
• So, in deficit financing there can be various options to finance and one of the options could be from RBI by printing money.