Govt. postpones monetization of deficits. My thoughts:
1. The govt. doesn't seem to be budgeting for its Covid-related expenditures right now. Instead, expenditures will be made as per need. If expenditures can be covered by borrowing, the govt. wants to avoid monetization.
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1. The govt. doesn't seem to be budgeting for its Covid-related expenditures right now. Instead, expenditures will be made as per need. If expenditures can be covered by borrowing, the govt. wants to avoid monetization.
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2. Why is the govt. reluctant to use the monetization route now?
Perhaps the govt. anticipates that we will run into an inflationary situation shortly due to acute supply dislocations.
Perhaps the govt. thinks creating more money will exacerbate this problem.
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Perhaps the govt. anticipates that we will run into an inflationary situation shortly due to acute supply dislocations.
Perhaps the govt. thinks creating more money will exacerbate this problem.
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3. If this is why the govt. is postponing monetization, then they are overlooking two facts.
4. First, there is no way that the expenditure that will be needed for such a calamity can be funded fully by govt. borrowing.
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4. First, there is no way that the expenditure that will be needed for such a calamity can be funded fully by govt. borrowing.
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5. Second, if a part of the deficit has to be monetized, it may be better to front-load it. Why?
6. Becoz initially, we will definitely be in a strongly demand-constrained situation and the extra money in the system due to monetization will not matter much.
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6. Becoz initially, we will definitely be in a strongly demand-constrained situation and the extra money in the system due to monetization will not matter much.
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7. In the second half of the year, some (now postponed) consumption demand will definitely be back and maybe some export demand too. The chances of running into a supply constraint due to disruptions are far higher at that point, making inflation a real possibility.
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8. Pushing more money into the system through deficit monetization will be far more difficult under those circumstances.
9. To sum up, it might be better for the govt. to have a tentative budget for this year (the Feb. budget has become irrelevant).
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9. To sum up, it might be better for the govt. to have a tentative budget for this year (the Feb. budget has become irrelevant).
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10. Based on that budget, the govt. should start financing it's expenditures based on a mix of borrowing and monetization.
11. A budget at this point will also help the private sector make its own plans accordingly and this may initiate some recovery. End.
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11. A budget at this point will also help the private sector make its own plans accordingly and this may initiate some recovery. End.
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