An uncommon meeting of minds between India’s left and right on economics should be an alarm to those who don’t belong to either. The two sides are tossing out similar and similarly absurd ideas. Before some silly order is being passed both the camps should acquaint themselves with the nuts and bolts of Modern Monetary Theory.
It postulates the inflation and not debts or deficits, which is the only real constraint on what a modern government not yoked to the gold standard can afford. Even for those who aren’t MMT cheerleaders, its basic contention is worth remembering. A money-printing sovereign that issues debts in its currency can’t run out of funds the same way as a household or a firm does. Pro- labour academics, activists, and social workers who think it is justified to seize private property to support India’s pandemic- flattened economy should know that such extreme measures are unwarranted. The proposal from a monetary conservative, pro-business side to use people’s gold as collateral to raise emergency public resources is also indefensible.
An extended lockdown, and the continuous rising of the infection and underwhelming monetary responses are the cause that a nation with 1.3 billion people is swaying towards self- defeating economic nationalism. In other ways, too, the crisis of lives and livelihoods is clouding rational thought. An otherwise well- memorandum by a group of economists and trade unionists asked the government to treat all cash, property bonds, and real estate held by Indian citizens or in the country as national resources during the COVID- 19 crisis.
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Amid all the criticism the idea was dropped. But on the other side, an equally unconventional proposal from the other end of the political spectrum more closely aligned with the government is far from dead. An article in the Business Standard last month said to print money to revive the economy, authorities are contemplating using gold held by citizens or a part of the official $500 billion in foreign- exchange reserves. When Soumya Kanti Ghosh, the chief economist of the State Bank of India, the country’s largest lender, sought to deflate the trial balloon this week in an op-ed, it became clear that the idea was getting traction, as reported by The Economic Times.
India owns 25, 000 tons of gold roughly one- eighth of the metal ever mined. Households usually keep gold in the form of jewellery, not bars, and can pledge it against loans. Why would they sell family heirlooms or wedding gifts to the central bank to watch it melt? The idea of using foreign reserves as collateral is much more perplexing. Those are already the Reserve Bank of India’s assets matched by liabilities, money on the other side of its balance sheet.
To create more rupees via this route, the RBI will have to buy more dollars from banks and give them newly minted currency. The only point of this fuss is to refrain from issuing government debt and save India’s credit rating, hovering one misstep away from junk. However, investors are naive. Swaying people’s gold for cash that buys them a few warm meals and a month or two of rent isn’t going to make bondholders optimistic about a revival of growth. This could be problematic given India’s history of current- account shortfall.
What the government ought to do?
So why not drop the pretentiousness, and openly run large government deficits and monetize them? Untimely monetary prudence would cause the debt- to- gross domestic product ratio jumps to 83% in the fiscal year through March 2021, from an estimated 70.9% in fiscal 2020, Bloomberg Economics, Abhishek Gupta projected last month. This week, he slashed his growth estimate to a 10.6% drop, from 4.5% previously, and raised his forecast of debt- to- GDP to 91%. The more this extra debt gets parked with the RBI, the less the pressure on the bond market to finance it. Public borrowing doesn’t cause a crunch when there’s a little private credit demand.
Difficulties arise because, in a developing country, people’s expectations of future inflation aren’t anchored to a central bank target. Labour and capital always don’t always move efficiently to where they’ll be productive. If the central bank boldly supports fiscal expansion, the 250 basis points excess yield investors are demanding for preferring 10- year Indian government bonds to three- month Treasury bills, triple the spread from a year ago could decline. Lower the long- term borrowing costs could even encourage issues of perpetual sovereign debt, as the SBI economist are recommending as an option.
Incomes and consumption are cratering, but as long as the state’s power to tax them isn’t durably impaired, it doesn’t require collateral to borrow. Even if they don’t buy the whole MMT package, sceptics can take this one lesson sitting back at their homes. Much better than plotting to beg, borrow or steal private property or double-dip into foreign reserves.