Burdened with promises & unstoppable largesse, the government is mulling printing new currency to tide over fiscal deficits.


A simple definition of fiscal deficit is the gap between the Government spending & it’s earnings. When spending is more than the earnings, the resulting change is called Fiscal deficit. It is also known as Current account deficit or Budget deficit & this is a common phenomenon afflicting governments all over the world. It is the stimulation & the remedial measures adopted that distinguish one nation’s buoyancy from the lethargy & paling of the other. To put things in perspective, US, one of the largest spenders in the world is one nation that tops the chart for any Government’s CAD year on year with some exceptional FY’s thrown in between. Yet it continues to the world’ mightiest economy.

India is no exception to the rule. The painful thing to note though is that even after seven decades of our independence, we continue to lag behind, unable to find solutions to most of our ills, plaguing our socio–economic progress. A burgeoning population, short term policy measures, populist propaganda, anathema to reforms, bulging void between the rich & the poor, incremental industrial policy, failure to open fully the private sector, lack of push to public –private partnership, land acquisition etc, labour reforms are a few of the reasons for India being where it is; An under developed nation, a developing economy. Successive governments have taken refuge under a notional continuum that could just be enough to fulfil a piecemeal agenda of governance, leading to cronyism & exclusive growth. It is when the burden of deficits & economic disparities widen to pitiable dimension that the governments wake up to some realisation & resorting to ballistic measures. One such proposal is the newest invention of the finance minister Mr. Piyush Goyal favouring printing currency as a way of deficit financing, citing the example of the US.

On one hand you wish to be seen as Pro poor with unstoppable announcements of largesse & on the other hand you begin scurrying for cover, suggesting the most predatory of the methods to tide over such financial commitments. It is this vicious cycle, a merry –go-round that governments have been happy swinging to at the cost of an inclusive sustained policy & program, so essential to nation building. Going by the latest estimate on CAD of over 3.4 per cent of the gross domestic product (GDP), it is anybody’s guess where we would end up in 12 months from now with an increasing proportion of public promises over anticipated revenues. It is ironic though that the minister would cite the FRBM Act that aims to institutionalise financial discipline, reduce India’s fiscal deficit, improve macroeconomic management and the overall management of the public funds through a balanced budget. The proposal to mint more currency runs parallel to the envisaged doctrine. However going by what this government actually belies in, it is no surprise that SPMCIL may be the next target after RBI which gave in to the serious & sustained campaign by the finance ministry to release the noose somewhat. Considering that the agency has posted a net profit of ₹630 crore last year, of which ₹200 crore has been handed over to the government as dividend, the Government may be eying a larger pie in coming months, hence this latest statement. According to senior officials, the company is on course to print 10,000 million pieces by the end of the current fiscal ending March.

Undoubtedly the economic policy of this government is trudging on a dangerous path. It has shown an alarming propensity in the last few months of its tenure towards fiscal extravagance rather than maintaining the necessary caution. It is veering towards an irresponsible monetary policy that is at cross purposes with its own agenda of prudent & inclusive development.

The more pertinent question that needs to be answered is whether the deficit should be financed by the Reserve Bank of India (RBI) by selling bonds in the market or by printing money? Private investment & borrowing are a norm in US & other countries just like India, though not on the same scale & frequency. The policy of issuing bonds has also not been so ingenious & these have on the contrary lead to speculation & hike in the interest rates. The other option is to print money. Not that such measures have not been resorted to in the past, however the manner & circumstances under which such an intervention is ought is suspect. Most central banks do it selectively. RBI has already monetized the deficit by buying oil bonds, through open market operations and by sequestering the funds in the market stabilization scheme. This is all part of what is now fashionably known as quantitative easing or the creation of new money by the central bank out of thin air.

It is not the bonafide requirement that is bothersome but the tendency & browbeating attitude of the powers to be that is causing discomfort in some top echelons of the RBI. Maybe, sensing such a campaign & pressure by the government made ex- Governor Urjit Patel to bow out of office, prematurely. Extreme pressure to monetise that forces RBI to operate the printing press at full speed to cover its burgeoning and high-risk deficit can take a toll. Two important events helped cut the umbilical cord between fiscal and monetary policy, to ensure that government profligacy does not spark off high inflation and financial instability. First, there was the 1997 deal between the finance ministry and RBI to do away with the so-called ad hoc treasury bills. These instruments of short-term government debt were initially introduced in the 1950s to help the government tide over temporary cash problems, but they eventually became a permanent feature of the Indian economy that allowed the finance ministry to almost automatically monetize the deficit. Second, the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 ensured that the government’s access to the printing press is even more restricted. The FRBM Act prevented the government from borrowing directly from RBI after 1 April 2006.

Our finance minister may have wanted to cite the US government practice as an example, but that is only half the truth known or spoken. That’s because the situation in the US is quite different. The credit markets there are dysfunctional. The base money created by the Federal Reserve through its balance sheet is growing faster than broad money, which means that the money multiplier is less than one.