Why waste a stimulus?

Former Governor of the Reserve Bank (RBI) Prof Raghuram Rajan has explained how to fund an economic stimulus by selling government bonds directly to the RBI. Normally, the government sells bonds to commercial banks. The government spends this money on public projects by paying companies which deposit the money back in banks. The RBI's balance sheet stays neutral. With banks reluctant to lend, the RBI should buy government bonds. The money will end up with banks which are parking money with the RBI at 3.75% interest. Since the government owns the RBI, it means it is borrowing at 3.75% interest instead of selling bonds to banks where yields are at 5.967% on 10-year benchmark bonds. This is known as monetization of the fiscal deficit. It can happen in two ways, explained Biagio Bossone. The central bank prints extra money and transfers it to the government, or the government sells bonds in the market and the central bank buys an equivalent amount from the secondary market, which are held to perpetuity and the interest is returned to the government. In both scenarios the government incurs no new debt. "Debt monetization by RBI was the norm in the 1980s and up to late 1990s Govt deficits were monetized through ad hoc treasury bills," wrote an editorial in the Economic Times. Benefits will be much higher than risks of inflation or excess credit. The strict lockdown in India has stopped farmers from transporting produce to markets, resulting in a crash in prices, wrote Sayantan Bera. Farmers are destroying crops as the cost of transport would be higher than the price they will get. This is especially true for perishable items like, fruits, vegetables and milk, wrote Ajay Vir Jakhar. Vegetable sowing is down is March and April and will be low in May as well. If the government is to increase subsidies to the poor there will be increased demand for food and inflation might follow. "Monetization is neither a game changer nor a catastrophe in abnormal times," said Rajan. "It helps a little at the margin, but does not solve the governments's fiscal problems nor does it lead to runaway inflation." However, all this discussion is completely unnecessary because the RBI is already monetizing the deficit. It has increased the cap on short term government borrowing from Rs 750 billion from April to September last year to Rs 2 trillion this year. The RBI "bought chinks of debt just after the government sold it, the latest data showed, further fueling talk that the central bank is supporting the nation's fund raising efforts," wrote Subhadip Sircar. The RBI has done "all the heavy lifting to date. The ball is now in the government's court. And has been so for a while now, unfortunately," wrote Mythili Bhusnurmath. However, after an early announcement of Rs 1.7 trillion for the poorest sections of society the government has been reluctant to announce any more, when the economy needs in excess of Rs 10 trillion, wrote an editorial in the Mint. Why, when the Prime Minister is expert at announcing new schemes, especially before elections? Maybe he is waiting for the election dates to be announced.