In the current situation of COVID-19 government is likely to consider the option of printing money to meets its emergency spending. So we all had this thought when we were young why can’t India print as much money when it needs. I will explain to you what happens if India starts doing that.
In India, the Reserve Bank of India (RBI) controls the currency market, and RBI prints the legal Indian currency. From 1956 India follows a minimum reserve system. In this system, RBI keeps a minimum reserve in the form of gold, bonds and foreign currency to maintain the demand and supply ratio of currency. RBI will print as much money to maintain this reserve.
If RBI prints more money and circulates in the market everyone will have money in their hand. When people get more money they tend to spend. So imagine everyone wants to buy a car which they wouldn’t have thought earlier because of the cash crunch will now buy a car. When everyone purchases a car, the demand for the car will increase when the demand increases the price goes up like a rocket.
I will explain to you better with an example where everyone would have experienced it. During COVID-19 pandemic surgical mask which normally sold at Rs 2 were sold at Rs 30 that is an increase of 1500%, do you know why? Everyone wants the mask and everyone had the cash to buy. So when demand increased and supply was less the price increased. This phenomenon is called Inflation.
When demands increase the general price of the product will increase to a bigger value-creating inflation in the market. Just like a small piece of rubber inflated to a bigger balloon. In order to avoid this kind of situation, RBI controls the demand and supply of the currency. So India doesn’t experience any Hyper -Inflation. When hyper-inflation happens in a country then there will be a situation where you need to take a truckload of money to go shopping. Technically speaking no country can solve their problem by minting money.
Hyper- Inflation has happened in countries like Germany, Zimbabwe, and Hungary. Zimbabwe is one country where hyperinflation is still going on, they try to solve their problem by printing money resulting in hyperinflation. Every citizen in Zimbabwe is a billionaire and they carry a sack load of money when they go for grocery shopping.
Yes, In the late 1980s and 1990s RBI did print money to support the government to meet all emergency spending and to bridge the fund gap for fiscal deficit (money spent by the government in excess than its total income). After that there was a team formed, Fiscal Responsibility and Budget Management (FRBM) to keep an eye on the economy to avoid these kinds of situations.
Now again the COVID- 19 Pandemic situation has created a devastating impact on the Indian economy. The government is considering the option to print money for balancing the fiscal deficit.
So what happens if India consider printing money to balance its deficit.
Our Indian government is also considering options to bring in more foreign investment and policies to be self-reliant. RBI on the other side buying tons of government bonds from the open market to infuse money into the system and keep the money flow intact .
Hope this also will pass through !!!!
Stay tuned!!!!
Thanks for explaining it so well, Lijo!