Should Government of India print money to overcome the economic crisis post Covid?
I have been reading many articles in many newspapers suggesting that the government (“Government of India”, “govt.”, “govt”) should print money in order to come out of the economic crisis caused by Covid. This is what the central banks of many developed economies did post the 2008 sub prime mortgage crisis. They printed nearly $9 trillion till 2016 and yet somehow the inflation was not a bothering factor. I am not very well versed in Economics having studied it only as a subject in my MBA days. Hence I consulted someone with an Economics background to understand how printing money can lead to inflation and currency devaluation. The two major economic issues that can cause fiscal problems for a trade deficit economy (where imports are more than exports) like India.
When a central bank prints money and loans it to the govt, govt through it’s various schemes ensures that the money reaches the bottom of the pyramid so that they start spending the money and start putting that money back in the economy. This cycle results in more demand for goods and services which is met by increase in supply. To support the increase in supply, more jobs are created, more people are employed and they get money, which is again pumped into the society and so on and so forth. Now if more people have money to purchase a product and the supply is restricted (as it takes time to build capacities to increase supply), the price of that commodity or service is bound to increase. How? Consider it like an auction. One artefact, many rich people with abundant wealth. Highest bidder takes it home. Now dumb it down to an economy and you may understand the economic link between excess money and inflation. The other outcome of printing money can be currency devaluation. Take a country like India. It’s imports are more than exports. When people have money, they will buy more. Given the nature of the economy, imports will increase. At one point, due to supply constraints, the imported products will become expensive as demand will outdo the supply. If the price increases, you will have to pay more dollars for the product. Now dollars’ supply is also restricted. When you go to your bank to buy dollars and imagine many hundreds doing the same, the bank would have to purchase these dollars as it will only have a limited reserve of dollars. Given the demand, it will be willing to pay more for every dollar and it will pass the additional cost to the end customer hence on a country wide level when this happens, dollar will become more expensive to rupee. And whom does the currency devaluation hurt the most? The govt! As it has to pay for oil and other essential goods in dollars and it will now have to shell out more money thereby increasing its fiscal/trade deficit. Basically it’s expenses will increase as compared to its income in a steady state (not factoring in an increase in income as in the current scenario, the pumping of money in economy will only help to restore the economy back to its original position)
Given the pros and cons of printing money, what should the govt do? US printed approx $4 trillion after 2008 to support its economy and inflation never reached the staggering heights which economics models and theories suggest. How did they managed that? Only they know. But in these times of crisis, do we really have any other option? Reliance on companies moving their base from China to India post Covid is not foolproof according to me. I have already voiced my reservations on why I don’t believe India could be a good substitute to China in the near future. If anyone reading this has an alternative theory or a diagonally opposite one, it would be interesting to read!