COVID-19 | Helicopter drop of money gets mainstream policy attention – Moneycontrol

How do you frame policies in a scenario that calls you to lock down the entire economy? How do you prescribe strategies when the only known solution, so far, is persistent social distancing for an indeterminate period?

As policy wonks from New York to New Delhi look for answers to these questions, a popular textbook theory is fast gaining traction to deal with the economic fallout of COVID-19: ‘helicopter drop’ of money.

Here’s a lowdown:

Why are governments across the world thinking of giving cash handouts to people?

Confining millions to their homes to contain COVID-19’s spread has had a direct bearing on the economy. An economy-wide squeeze has made those at the lowest income scale, such as migrant daily wagers and street vendors, most vulnerable. These are the class of people who need immediate hand-holding and one of the surest ways of doing that is to put more money in their hands and bank accounts.

So, where’s the problem?

The problem, however, is where will the governments get the money to finance such a programme.

Why can’t the government borrow and spend?

Higher government borrowing can end up raising loan rates for individuals and corporates.

How? What is the relationship between government borrowing and individual borrowing rates?

The government, companies and individuals all borrow from the same pool of lendable resources of banks. Higher government borrowing would imply that banks will have lesser amounts to lend to individuals and corporates. This can push up interest rates as companies and households will jostle to borrow from a shrinking lendable pie.

Also Read: Now is the right time for a ‘Helicopter Drop’ of money in India

Why doesn’t the RBI print extra notes to lend to the government?

A dominant view is emerging that the central bank, or the RBI, should print more money for the government to spend. This is called “monetisation” of the fiscal deficit.

What does the ‘monetisation’ of the fiscal deficit mean?

The fiscal deficit is a measure of government borrowing. Monetising deficit means that the RBI prints more money to finance the government’s debt.

Didn’t India monetise its deficit earlier?

Until 1997 fiscal deficit was automatically monetised, by printing extra currency, through the issue of special securities called ad-hoc Treasury Bills.

The government, through the Finance Act 2017, enabled the RBI to print extra currency to partly monetise the Centre’s fiscal deficit under certain conditions.

What is helicopter drop?

Helicopter drop (a metaphorical descriptor), first coined by Nobel laureate Milton Friedman, is an unconventional policy tool, where the country’s central bank prints large sums of currency notes.

These are printed specifically to allow the government to distribute it among citizens to raise their income levels, enable more spending and stimulate a falling economy.

The helicopter-drop theory is predicated on the basic assumption that the money put directly in people’s bank accounts will prompt them to spend parts of it on goods and services, boost demand for products and help keep the economy stay afloat.

Isn’t it the same thing as monetisation of the fiscal deficit or quantitative easing?

Quantitative easing and monetisation of fiscal deficit also involve central banks printing extra currency to buy government bonds. But, unlike “helicopter drop”, in quantitative easing the government has to pay back for the assets that the central bank buys.

In “helicopter drop”, the central bank prints the currency notes, gives it to the government, which doesn’t return them. It is non-repayable money transfer from the central bank to the government.

Has any country used ‘helicopter drop’ to deal with the current crisis?

New Zealand is considering distributing free cash directly to individuals as a way of policy stimulus to help boost the economy reeling from a COVID-19 pandemic driven contraction.

Why hasn’t India attempted it to help the poor and vulnerable?

Such an approach can bring into question the central bank’s independence. Why should the RBI print extra notes for the political establishment to distribute? It also has execution hurdles. Who determines how much needs to be paid for how long and to whom?

The informal nature of India’s labour market makes it difficult to execute a helicopter-drop cash transfer. Administrative efficiency and data quality are big challenges, too.

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