Centre may monetise borrowings if fiscal deficit exceeds estimate: Report

The Centre may consider monetising its borrowings if fiscal deficit significantly exceeds the Rs 12 lakh crore limit.

“The government will need to take decisions based on what is the prudent level of spending it has to incur,” a government official said as per a report by The Economic Times, adding that this could be addressed by either borrowing further till sustainable levels and then “monetising to the extent it cannot be.”

Follow our LIVE Updates on the coronavirus pandemic here

Borrowing limit for FY21 was already raised from Rs 7.8 lakh crore to Rs 12 lakh crore due to the present economic situation arising from the coronavirus pandemic. Experts estimate the Rs 20 lakh crore financial stimulus package announced by the government would create impact equivalent to 1 percent of the country’s gross domestic product (GDP).

As part of the stimulus, Finance Minister Nirmala Sitharaman on May 17 also announced that the borrowing limits for states in FY21 is increased from 3 percent to 5 percent, subject to conditions. This will provide state governments an additional Rs 4.28 lakh crore.

The official pointed out that inflationary concerns could be easily addressed, as due to the deficient demand, “this is not a situation where monetisation will be inflationary.”

“Go directly to the market— the interest yields will rise, but if you don’t, then interest rate remains the same and it might even fall. Debt monetisation improves long term sustainability as it will keep interest rates in check,” the official added.

To monetise debt, allowing Centre to meet expenditure, the Reserve Bank of India (RBI) will directly buy government bonds and securities (G-Secs) in the primary market by printing more money. The practice was common before 1997, when it was halted.

Follow our full COVID-19 coverage here