News:


In this page, we will keep you updated with every new happenings in the world of construction all over the world with our team who are constantly updating it. Stay connected and know more.

Deficit Monetisation : Covid-19 Likely To Force Government To Borrow More - Posted on: 11-09-2020


The officials have already discussed the possibility of monetising the debt, whereby the central bank prints money to bridge the fiscal deficit.

Revenue shortfalls in India, the major economy hardest hit by the coronavirus pandemic, are likely to force the government to borrow more, but it will only consider monetising its deficit as a last resort, sources familiar with discussions told Reuters.

Borrowing plans for the second half of the financial year, ending on March 31, will be reviewed by government and Reserve Bank of India (RBI) officials later this month, the five sources said.

The officials have already discussed the possibility of monetising the debt, whereby the central bank prints money to bridge the fiscal deficit, but they were in no hurry to return to a bad habit India kicked in 1997.

"There will definitely be higher borrowing in the current year but whether we will print money, that is not yet decided. We will have to have patience and see how things go," a senior official said.

A senior government official said debt monetization was "not the preferred option right now."

"We have seen what some of the countries have done in this regard, but we think that such a move would be the last resort for us," the official added.

Aside from potentially harming India's credit rating, monetisation carries inflation risks that would be politically worrying in a country where voters are extremely sensitive to changes in food prices.

The senior government official said the central bank could ease liquidity through open market operations to keep yields in check while helping the government to increase borrowing, already targeted at a record ? 12 lakh crore ($163 billion).

RBI has pumped in over ? 11 lakh crore of liquidity into the market, helping to keep 10-year bond yields below 6 per cent even as the government decided to borrow 70 per cent more than last year as a result of the pandemic.

Despite being under one of the strictest lockdowns for over four months India currently has the second highest number of coronavirus cases globally with economic activity curtailed and government revenues severely affected.

India's GDP contracted 23.9 per cent on year in the April-June quarter, with Goldman Sachs now projecting a full-year contraction of 14.8 per cent.

Officials, however, are still pinning some hopes on raising revenue from the sale of the state-owned firms even though they do not expect to meet the target of over ? 2 lakh crore for divestment sales this year.

"The dilemma over deficit monetisation is not unique to India," said Radhika Rao, economist with DBS. "The primary challenge is to communicate and ensure that this is a one-off pandemic-induced arrangement and not a recurrent financing line."

*****