Unlimited Money and Inflation

Let’s Print Money

Since the COVID Pandemic has been hanging like a sword on the Indian economy and the citizens’ necks, a question is circulating like wildfire – Why cannot the Reserve Bank of India (RBI) print more currency to alleviate the poor’s pains? Well, as good as it sounds, printing Currency comes with its strings attached.

In March 2020, when COVID-19 hit India, we did not know how big of a dent this disease would put on our economy. Suddenly all activities except Agriculture stopped, Incomes were frozen, Demand and Supply went haywire, and the Healthcare system was under immense pressure. As a result, markets crashed, and liquidity was wiped out from the economy. So naturally, the Government had to step in to revive the economy. To increase the supply of cash in the economy, the Government could take several steps. The first is to raise taxes, but this was not viable as incomes had already dried up. Instead, the Government could borrow money from private sources, although this would have pushed interest rates. Foreign Investors locked their cash by buying US Treasury Bonds. They seemed like a safer alternative to the faltering Indian economy.

Consequently, the Government knocked on the door of the lender of last resort – the Reserve Bank of India. However, borrowing from RBI was a bit different from borrowing from Private entities. Money borrowed from private individuals already existed in the economy, but money borrowed from RBI is created from thin air. RBI agrees to print money in exchange for Government Bonds, which guarantees that the Government would return the money in a stipulated amount of time.

Ah, The Catch

Flushed with liquidity, the Government spends on essential services like Healthcare, Vaccine procurement, Relief activities, and Distributing money to the poor through various schemes. However, where is the catch? Shouldn’t all governments keep on printing cash? To illustrate, let us assume that there are only two people in a country, and they both have Rs.10, and the cost of 1 kg of Wheat is Rs.10. As of now, both can afford one kg of Rice, but suddenly the Government starts printing more money, and both receive an additional Rs.10. Now, both have Rs.20 and can afford 2 kg of Wheat. As demand doubles and the seller recognizes that both can afford to pay Rs.20 for Wheat, he pushes up the price of Wheat to Rs.20. The technical term for this situation is inflation. Inflation is a necessary evil because moderate inflation is required for robust economic growth. However, excessive inflation leads to the failure of economies. Take the case of Zimbabwe. To combat rising national debt and poverty, the Government started recklessly printing money which led to a massive inflation rate of 79,60,00,00,000% in November 2008. This meant a daily inflation rate of 98%, which meant that prices of goods and services doubled every day. Bread that you bought for 10 Zimbabwean Dollars would cost 20 Dollars the next day.

Inflation can also eat up your savings. Since 2014, inflation has stayed in the range of 5.8-3.4%, except in 2020, when it shot up to 6.2%. These percentages state that if you keep your savings in cash after one year, their values will decrease by that amount next year. This reason is enough to argue that investing is essential for every citizen. Invest your money where the interest rate is higher than the inflation rate, and your money will grow over the following years.

The Government needs to tread cautiously in matters of inflation. As outcomes of inflation come with a lag, it is necessary to take the advice of experienced economists to review the monetary policies. Reckless spending can lead to a rise in Non-Performing Assets (NPA’s) and invite downgrading by Credit agencies due to unsustainable practices of the Government. On the other hand, when the Reserve Bank of India (RBI) uses its printing press in a calculated way, it can genuinely alleviate the pains of the poor without causing any long-term consequences.