Experts Suggest Printing Money to Save Economy: How Does it Work?

Printing money will boost liquidity in the economy, thereby driving inflation.

3 min read
Experts Suggest Printing Money to Save Economy: How Does it Work?
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With the economy battered by the COVID-19 pandemic and the dismal Gross Domestic Product (GDP) growth figures for FY 2020-21, several experts have suggested ‘printing money’ as an option to soften the blow on the economy.

Nobel laureate Abhijit Banerjee suggested that India should print money liberally and transfer cash directly to the sections of the society that need it the most. Uday Kotak, the executive vice-chairman and managing director of Kotak Mahindra Bank also echoed a similar opinion.

This suggestion came even before the government released its latest estimates of economic growth for the last financial year that ended in March 2021, stating that the GDP contracted 7.3% in 2020-21.

However, what happens when a country prints too much of its currency? While the COVID crisis has crippled economies around the world, have other nations considered this option? Will it help India in the current situation?


What is Printing Money?

Governments often turn to printing money in order to increase the amount of cash or liquidity in the economy.

The central bank buys bonds or other assets from the private sectors in exchange for reserves and account balances to print more money.

Traditionally, printing money drives the demand for goods and services higher, in turn causing inflation. Hence the amount of money in circulation has to be in line with the economic output being produced by the country.


Will Printing Money Revive the Economy?

India is currently a ‘demand constrained’ economy, which means the factories in the country are producing below capacity, as the consumers do not have purchasing power in the wake of job losses and shutting down of business during the pandemic.

But if more money is printed, it will stimulate demand, increase output, reduce inflation and also increase the purchasing power of consumers.

“I think we should absolutely do it. We need resources to support the poor as well as to deal with a bunch of potential defaults on loans – the latter was avoided in the first wave by some government credit guarantees. Plus we need the resources to buy enough vaccines. This is the ideal moment to do that,” said Banerjee in an interview with The Times of India.

Uday Kotak is of the same view. He says, “In my view, this is the time to expand the balance sheet of the government, duly supported by the RBI... for monetary expansion or printing of money. The time has come for us to be doing some of that... If not now, when?”

It is important to note that this is only possible if things are properly planned.

Aunindyo Chakravarty in a blog written for NDTV explains that printing money and then just letting “market forces determine how it is spent will not work.”

The government has to plan who to give it to and what kind of demand to stimulate. “The money needs to go to those who need it the most, it needs to be spent on sectors that generate the maximum employment", he added.

Doing so otherwise will end up lining the pockets of the wealthy and increasing India's incredible inequality.


How Is The US Doing It ?

The Federal Reserve of United States is virtually 'printing' money and injecting it into the commercial banking system, much like an electronic deposit.

This means that the Fed has started making large asset purchases on the open market by adding newly created electronic dollars to the reserves of banks.

In exchange, the Fed receives large amounts of bonds – that are backed by bundles of home mortgages.

According to Oxford Economics, by the end of the year, the Fed will purchase $3.5 trillion in government securities with these newly created virtual dollars.

This has made credit easier to obtain, with a bigger money supply and lower interest rates.

Federal Reserve Chairman Jerome Powell said at a recent news conference that these purchases have helped market conditions improve “substantially” in recent weeks.

Has India ‘Printed Money’ in the Past?

Until 1997, the RBI automatically monetised the government’s deficit. This means that the government dealt with the RBI directly — bypassing the financial system — and asked it to print new currency in return for new bonds that the government gives to the RBI.

In 1994, Manmohan Singh (former RBI Governor and then Finance Minister) and C Rangarajan, then RBI Governor, decided to end this facility by 1997 due to inflation.

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Topics:  RBI   GDP   coronavirus economy 

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