Author: Economicsscoop

For once, many of us might have got this common doubt that ‘why can’t RBI print more currency during a crisis time to help the country and the people.

During this coronavirus adverse effect on the economy, this might seem a solution to many but why can’t this be considered a solution.

The main reason is Inflation. If the rotation of money increases then the money will lose its value.

By printing more currency notes the rotation of currency notes in the public’s hand will increase and the people of the country would be capable of buying more goods. Since the money in hands of the public are increased they would want to lead a luxurious life and perhaps would want to consume more goods. But the availability of more goods arises is not increased since the production of goods are not increased.

Due to the limited availability of various resources, the production of goods cannot be increased. Hence the production remains the same.

This creates a situation where people have more money but the production is less. This phenomenon is called “hyper inflation”.

When people have more money there would be a rise in the demand for goods since the number of capable buyers increases which will eventually raise the prices of the goods.

Countries like Zimbabwe, Venezuela has tried and failed. It is said that during Hyperinflation in Zimbabwe, a piece of whole bread price was around 15,000/- Indian rupee in 2008.

The government and the RBI needs to maintain the balance between the production and currency rotation in the hands of the public to avoid such situations.

Printing money can’t be the solution to raise the economy. In order to increase the economy, production must be improved.

Our prime minister on 12 May 2020 announced 20 lakh crore Atmanirbhar package, says size is 10 % of GDP, including the announcements by RBI and FM earlier.

Here’s the breakup of relief package :

FIRST on 26 March 2020, FM (Finance minister) announces the pradhan mantra garib kalyan yojana with the size of package Rs. 1.7 lakh crore. The additional fiscal cost Rs. 85695 crore also being announced which comprises funds from PM Kisan funds, construction workers welfare cess fund, and district mineral foundation funds. FISCAL COST: ZERO

SECOND on 27 March 2020, liquidity injection by RBI (Reserve Bank of India) Rs. 3.74 lakh crore, on 17 April injection of Rs. 1 lakh crore and on 27 April of Rs.50000 crores. The liquidity injection made by RBI is part of monetary policy and not the fiscal policy. Fiscal policy involves the government changing tax rates and government spending to influence demand. Monetary policy involves changing of interest rates and influencing money supply by the central bank. FISCAL COST: ZERO

THIRD on 13 May 2020 Tranche 1 of Atmanirbhar package Size of package: Rs. 5.94 lakh crore comprises of *Collateral free loans to MSME, credit cover to the bank, NBFC: Rs. 3 lakh crore. * Further support to MSME as debt and equity infusion: Rs. 70000 crores * EPF support and contribution reduced for 3 months: Rs. 750 crore * Further liquidity scheme for NBFC and credit guarantee scheme Rs. 75000 crore. * liquidity injection by power finance corp Rs. 90000 crore * 25% reduction in TDS /TCS Rs. 50000 crore FISCAL COST: Rs. 255000 crore

FOURTH on 14 MAY 2020 Tranche 2 Size of package: Rs. 3.10 lakh crore * Free food grains supply to migrants for 2 months: Rs.35000 crores. *special liquidity injection for street vendors Rs.5000 crores. * Interest subsection of 2% of mudra sushi loans Rs. 1500 crore and credit-linked subsidy to the middle-income family (Rs. 6-18 lakh a year ). * Additional working capital through NABARD and concessional credit through Kisan credit to farmers: Rs. 30000 crore and Rs. 2 lakh crore. FISCAL COST: RS. 5000 crore

FIFTH on 15 May 2020 Tranche 3 Size of package: Rs. 1.5 lakh crore *Financing facility for Agri infra projects: Rs 100000 crore *Scheme for the formalization of Micro Food Enterprises: Rs 10000 crore * Funding for fishermen: Rs.20000 crores. *Animal Husbandry Infrastructure Development Fund to be set up: Rs 15,000 crore FISCAL COST: Rs. 30000 crore

SIXTH on 16 May 2020 Tranche 4 Size of package: Rs. 8100 crore *Defence FDI hiked to 74% from 49%. *Viability gap funding (VGP) for social infrastructure. FISCAL COST: Rs. 8100 crore

SEVENTH on 17 May 2020 Tranche 5 *Limit of state borrowing increased to 5% from 3% of GDP *MGNREGA gets additional Rs 40000 crore FISCAL COST: Rs. 40000 crore.

Now have a look at the opinion given by News 18 India:-

“Almost 84 percent of the Rs 20 lakh crore economic Atma Nirbhar Bharat package, announced by Prime Minister Narendra Modi on May 12 and rolled out by the Finance Minister Nirmala Sitharaman over the next five days, has been in the form of loans and other liquidity measures — effectively implying no cost or cash outflow to the exchequer.

A break up of the package compiled from the press release on May 13 and 14 reveals that Rs 16,60,050 crore were in the form of loan and other liquidity measures. This means that the actual Cost to Government in the Atma Nirbhar package in the form of subsidy or cash outflow is just Rs 3,20,902 crore (16 per cent of the total package).

The government pushed some major reforms in agriculture and public sector enterprises but also re-packaged some of the old measures. 

VGF (Viability Gap Funding) for social infrastructure to get private investors on board was already a part of the 2020-21 Budget. Similarly, the ranking of industrial parks along with mapping the land banks on Industrial Information System (IIS) was an old proposal from 2013.”