2 min read.Updated: 29 Jul 2021, 04:50 PM ISTLivemint
Various governments, banks and financial institutions around the world have often resorted to the innovative mechanism of issuing special bonds to raise resources for response and recovery in difficult situations, the industry lobby said
NEW DELHI :
Industry lobby PHDCCI on Thursday suggested that the government should issue special covid-19 bonds to meet growing demand for resources to stimulate the pandemic-ravaged economy.
While thanking finance minister Nirmala Sithraman for her recent statement that the government has no plan to go for direct monetization of its fiscal deficit, Sanjay Aggarwal, president at PHDCCI, said the government can consider raising funds from the issuance of special covid bonds as part of budgeted borrowings to finance its fiscal measures and stimulate the economy through public spending. “Issuance of special covid bonds could become an appropriate substitute to market borrowings by the government. Various governments, banks and financial institutions around the world have often resorted to the innovative mechanism of issuing special bonds to raise resources for response and recovery in difficult situations. Such special bonds involve relatively low inflation risk, limit the crowding-out of private investments from other sectors of the economy, and forms a source of tax-free income for bond holders," Aggarwal added.
Fiscal deficit occurs when government's expenditure exceeds revenues in a year. The government finances its fiscal deficit through various sources such as market borrowings, securities against small savings, state provident fund, external debt, and taxing or printing money. Monetization of fiscal deficit or printing of money is generally the least preferred because of the risks of high inflation and currency depreciation, apart from a general deterioration in macroeconomic balance.
Financing the fiscal deficit by printing more and more currency leads to increase in money supply in the economy, and hence results in a higher rate of inflation. “This would escalate the already high inflation in the Indian economy. The WPI inflation has been on a double-digit growth trajectory since the last three months, thereby posing a serious challenge to the small businesses operating in the difficult pandemic times. It is impacting the cost of production and reducing price-cost margin of the producers and eventually their competitiveness in the domestic and international markets. So, financing a persistent deficit by money creation will lead to a sustained inflation," the industry chamber said.
Aggarwal said India's current macroeconomic situation is certainly better than what it was during the first wave of the covid-19 pandemic. “Going forward, there would be a faster economic recovery on the back of proactive reforms undertaken by the government during the last several quarters, along with meaningful steps taken to prevent or minimize the impact of the potential third wave of covid-19," he added.