2. Currency Pumping- A Solution to our Economic Problems?

 

  

Since time immemorial, our elders have been saying that the Indian economy is ‘developing’ and now the Covid crisis has further worsened our economic conditions and we are losing hope on seeing it as 'developed' soon.

Due to a sudden demand slack of non-essentials during early Covid times, which now seems to be some centuries before, there is less GST revenue. Foreign trade has also seen bad times, so again, there is less income from exports. With alcohol shops shut for a long time, further hope lost. So there was a massive fall in govt income and fueling the fire is that our high demand on petroleum crude forces us to import it. So basic mathematics, there is less income and more to spend. Clearly there’s a very high fiscal deficit.

Government pumping money into the economy- is it really a viable solution to our economic problems?

Milton Friedman, notable economist once said, “There’s no such thing as FREE LUNCH in economics.”

It is very common of citizens, businessmen or even economists to suggest printing currency and pumping money to stabilize the economy. It’s so true human beings suffer from availability bias, we make decisions based on what’s in front of us, we tend to ignore what might be awaiting. Printing currency to revive our economy is like that ‘free lunch’ which comes with a huge cost!!

Now how this system functions is that the government issues treasury bills to the RBI, which then prints new currency. Logically, it’s a very nice measure as increase in currency leads to increase in govt expenditures and employment opportunities. For a lay man, it seems very viable. But if we think deeply, the situation will actually get worsened.

An increase in money supply would lead to increase in demand for goods and services, which will correspond to inflationary pressures, then the goods and services will become costlier. So ideally, whatever you earned because of that increase in currency supply is actually neutralized by the increase in inflation! So, you can’t be sure of what you earn on a NET basis!

And inflation would also make sure that the value of our currency depreciates. if that happens, foreign investors will leave the market and considering the fact that India relies highly on FDI and FII for capital receipts, this is bad news!

It is a nice solution in the short run, but in the long run perspective, it doesn’t solve economic problems, in fact it aggravates it, this vicious cycle of poverty and unemployment continues.

Some real-time long run solutions to solving our economic problems can be:

1)     1) Government should invest and fund start-ups as they in the coming future, they are going to be the building blocks for growth and development and their contribution towards alleviating unemployment is of paramount importance.

2)     2) Expand education in villages as there is abundant human capital in the deep rooted villages of India. People richly possess skills, which only needs to be channelized and directed in the right way.

3)    3)  Provide easily accessible technology to farmers as agriculture is a major contributor to Indian economy. The current condition of the farmers is pitiable. The strikes, the suicide rates all point out towards the ailing condition of this sector.

4)    4)  And lastly the best one is that govt should encourage the public to invest in debt instruments instead of just keeping their money in savings account, which would really boost Indian economy. Savings account interests are way less than the inflation rates, and the value of your money will eventually go down cumulatively. Debt instruments however risky, provide huge returns not just to the investors but also the business houses and corporates, aiding them in their production processes, thereby making a small, yet significant contribution in the blossoming of our economy.

Cheers!