Recession means reduces the power of purchase in short no money to spend. The simple solution is to print currency and distribute that money to its citizens. So, it will be great that everyone will get money and so everyone will live a comfortable life.

Right?

There are some countries like the USA, the European central bank, Japan, Turkey, and Indonesia that have also chosen the same solution of printing money to bring economies back to life. 

Wait! It’s not easy. Before concluding, we need to understand the impact of printing money on the economy.

Fiscal Deficit:

Fiscal Deficit = Total expenditure of the government – Total income of the government.

In the above formula expenditures are capital and revenue expenditures and income are revenues from taxes, loan recovery, and other receipts.

If the total expenditure of the government exceeds its total revenue and non-revenue receipts, then that gap is the fiscal deficit. The fiscal deficit is usually mentioned as a percentage of GDP.

Means, for FY 2019-20, the central government’s receipts through income taxes, GST, and other receipts were Rs 19.32 lakh crore, while its expenditure on schemes, subsidies, and infrastructure, interest payments were Rs 26.98 lakh crore.

Hence, the fiscal deficit was Rs 7.66 lakh crore. It is expressed as a percentage of the GDP. The figure was 3.8% in FY 2019-20.

Rs. 13.32 lakh crore – Rs. 26.98 lakh crore = Rs. 7.66 lakh crore

As per the above example, the government has a deficit of money and the government must borrow money from the market to finance the deficit. So, they issue bonds which are subscribed by institutional investors and individuals. They lend money to the government against some interest in return.

What is the reason for the fiscal deficit?

In all budget policymakers or governments announce some popular schemes or programs for the welfare of poor sectors. These schemes announce without increasing the tax burden on taxpayers. This results in high expenses than income and creates a fiscal deficit.

Monetization of fiscal Deficit.

When the central bank i.e the Reserve bank of India purchases the government bonds is called monetization of fiscal deficit. But to purchase these bonds central bank prints new currency. This helps the government to finance the spending needs.

Now the government has to inject this money into the economy to create jobs, infrastructure projects, citizen welfare schemes, etc. to boost the economy.

Then why RBI or government is not printing new currency?

Because we always learn from history and history of printing extra currency is having very bad stories. A few years back we experienced the hyperinflation of Zimbabwe and Venezuela. In Zimbabwe, prices rose as much as 231,000,000% in a single year in 2008.

Printing more money increases the money supply in the economy. Now everyone has more money, more money means increased purchasing power, which means high demand for goods and services. This leads to an increase in prices of products or services resulting in high inflation.

Who should print the currency and who should not?

In the present scenario i.e pandemic as there will not be a large change in demand so there will not much rise in inflation. But during the recovery phase, this increased money supply may create higher inflation. Will also downgrade the rupee value.

This monetization of fiscal deficit can be helpful for developed countries where they are having high technology or capacity to match the demand and supply of goods and services. As globally USD is still having demand so it may not hamper the US economy to that extend.

Conclusion:

If we think from the perspective of developing countries, then direct monetization could weaken the micro fundamentals of the country resulting in a weak economy. So, the monetising fiscal deficit can be a riskier option in this situation.