Title may seems fascinating but wait whether it is really possible to do so?
Latest hot topic in news is Banker Uday Kotak has called on the government and the Reserve Bank of India to expand their balance sheet i.e print money, to help support the economy amid the continuing Covid-19 pandemic.
Crisis tests the robustness of an economy. The entire nation was in the grip of the deadly virus. Health infrastructure was under pressure. Sustaining for so long without an active income source while meeting the family’s daily expenses and healthcare costs would be a tough for majority of our population. it was on the government to step up and pull the nation out of the crisis
One question always comes with such recessionary conditions in the economy-
Why Central government is not asking RBI to print tonnes of notes and just come out of such conditions.
Lets Figure out the real reason behind the same.
Why RBI Print Currency?
People ask many times if the government has lot of money through taxes why can’t government just spend all of such proceeds?
Well, answer for the same is it does. Multiple time expenditure exceeds their revenues which is termed as deficit in technical terms. Central government always try to keep the same as low as possible however it is not that easy it seems.
But the government has to go out and spend - on health, on people, on hospitals, on oxygen supply, on vaccination drives. As we all know revenue sources reduction for government in lockdown period, government has only one way to come out of it is to borrow and spend.
Now, the government can borrow from several sources - from people, from private investors, foreign countries, etc. However, in times of crisis, no one is really willing to lend.
So, now what?
The government take loan from 'lender of last resort’ - the RBI. But borrowing from the RBI is very different from normal borrowings. People lend you the money they’ve saved But if the RBI wants to lend, from where they will come?
RBI need to print the same like money that didn’t exist 5 minutes ago! And this is known as ‘Monetizing the deficit ’concept.What it will do, it will increase money in circulation.
Let us see one simple example-
Suppose two persons are residing in a country with an income of Rs 10 p.a. each, and the only good produced in the economy is 2kg of rice. At present, suppose 1kg rice costs Rs. 10. So, both the persons earning Rs. 10 each can buy 1kg of rice each and feed their families.
Imagine, all of a sudden, the government starts printing more money, and then, each of them has Rs 20. But the supply of rice remains the same, i.e., 2 kg. With more cash in hand, the demand for rice has gone up (each of them can now afford the entire 2 kilograms of rice).
The shopkeepers know the fact that now each of them can shell out Rs 20 for rice. So, to meet the entire demand, they’ll double the price of rice. So, now a Kg of rice would cost Rs 20! And that’s how more money can lead to a rise in prices
Hence printing money will go hand in hand with manufacturing otherwise massive inflation will create.
Factors to be considered while printing new currency
Inflation reduces the purchasing power of each unit of currency. Increase in the prices of goods and services over time. That means you have to spend more to buy a sugar, fill your gas tank or get a haircut. Inflation increases your cost of living
And excessive money in supply can actually lead to ‘hyperinflation ’too. In the year 2008, Zimbabwe witnessed 2,31,000,000% inflation Meaning a food that cost them $1 in 2007 would require $231 Mn in 2008. Hard to belive!!
Minimum prescribed Reserve
Currency issued in the country relies upon the reserves RBI has with it after meeting all its liabilities.
Reserve with RBI consist of
Foreign exchange reserves
Balance of Payment (BOP)
In India, currencies are supplied by the RBI with the backing of bullion reserves, foreign exchange reserves (foreign currencies), and Balance of payment. For the new issue of currencies, the RBI follows the Minimum Reserve System at present.
Under MRS, the RBI has to keep a minimum reserve of Rs 200 crore comprising gold bullion and gold coin, and foreign currencies. Out of the total Rs 200 crores, Rs115 crore should be in the form of gold bullion or gold coins. The purpose of shifting to MRS was to expand the money supply to meet the increasing transactions in the economy.
Gross Domestic Product
GDP growth rate is an important indicator of the economic performance of a nation.
GDP is the final value of the goods and services produced within the geographic boundaries of a country during a specified period, usually a year. GDP is another critical factor that affects the amount of money to be printed in the economy. The government prints money of the same value, as its value has gained into their economy or, in a simple way, GDP. So, rising economic productivity – GDP increases the value of money in circulation since each currency unit can subsequently be traded for more valuable goods and services.
The government gives people the same amount of physical currency as a medium of exchange as the value it is getting in return from GDP and inflation.
Soiled and Mutilated note
Soiled note means a note which is now become out of use and includes a two-piece note pasted together wherein both the pieces presented belong to the same note and form the entire note.
Mutilated banknote is a banknote, of which a portion is missing or composed of more than two pieces.
Soiled and mutilated banknotes that are not fit for circulation are withdrawn from circulation after duly accounting for them in the RBI records. These are then burnt in the incinerators provided at the regional offices of the RBI under supervision of the RBI officials. Hence in order to replace such useless notes RBI can initiate printing of new currency.
After considering Inflation, GDP, and clearance of old notes, The Issue department of RBI, and Management department of RBI will come with an estimate of the currency required and put the demand sheet in front of the central government for approval.
Management between RBI & GOI
RBI discusses with the Government of India with respect to the denomination, security features, designing, and of the banknotes to be printed in the country.
The printing of Re.1 currency notes and other coins fall within the jurisdiction of the GOI. After getting approval, it will follow up the process of printing.
How they calculate need for money
The projected GDP figure is available from Govt, and RBI's own Research Wing (A)
We know the cash with RBI and Banks -under Note stock account (B)
Then there is replacement demand due to the destruction of soiled notes (C)
Notes to be printed = A - B + C
In India, a 5% extra is added to meet the emergency. This will be counter-checked from Regional Offices and Banks estimates and consolidated and checked in DCM Central Office, RBI Mumbai.
Then denomination-wise breakup is taken for printing, and a print order is given to printing presses and printed in 4 quarters, and remittances planned accordingly. The RBI Issue Department monitors the entire procedure.
By now, you must be clear that saying and doing are two completely different things. It takes nothing to sit at home in the comfort of your couch and spell out claims that the RBI should float money in the economy. But it’s not that easy in reality.
Name- Hardik Manoj Gujarathi