Thursday, July 25

India’s Deficit Monetization Dilemma and a Solution: A Revamped Budget.

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By Sabyasachi Kar & Siddharth Naidu

It is becoming increasingly clear that following the Covid-19 pandemic, the Indian government will have to provide massive support to the health sector, the poor and vulnerable citizens, the small firms and the economy as a whole, over this year 2020-21. There is a strong consensus, with support from past central bankers, that a sizeable part of this expenditure will have to be funded by the RBI, i.e., the deficit will have to be monetized. In terms of macroeconomic policy stance, one major shift that is taking place is understanding that this crisis will need fiscal dominance to make a comeback and monetary policy will have to play a supportive role.

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