The HINDU Notes – 09th June 2020 - VISION

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Tuesday, June 09, 2020

The HINDU Notes – 09th June 2020

πŸ“° ‘Farmers are strong, not vulnerable; they need to be given choices’

Option for direct marketing during the lockdown period has reduced government procurement of wheat in some States, says Agriculture Secretary

•The disruption caused by the COVID-19 pandemic led to at least 12 States allowing direct marketing of agriculture produce, which offered greater options to farmers during the lockdown, Agriculture Secretary Sanjay Agarwal says. The two new ordinances pushing agricultural marketing reform will widen choices for small farmers, he adds.

Despite the lockdown, this year’s wheat harvest hit record highs, and government procurement at minimum support prices (MSP) is also higher than last year. However, Haryana and Uttar Pradesh have fallen short of procurement targets. What is the reason?

•I was looking at a video of ITC. This year, because direct marketing was allowed for farmers to sell their produce during the lockdown, they had a line of over two km of tractors outside their purchasing centres. If as a farmer, you are faced with the cost of transport to an MSP centre, and if you are getting the same price at the village level, what will you do? In fact, this year, procurement centres were two and a half times more in comparison to last year. But because direct marketing was allowed and a corporate purchaser was available, that gave the farmer a choice and that changes everything. And that becomes the logic of bringing the trade and commerce ordinance this year, where direct marketing takes place.

Speaking of these two ordinances to reform agriculture marketing and facilitate contract farming, how will they help small farmers?

•Both ordinances will be most beneficial to small and marginal farmers. A farmer’s produce is unregulated at time of production, but there are restrictions on where to sell and whom to sell, which is not there for any other commodity globally or in India. The Farm Trade ordinance will open up this ecosystem.

•Right now, the farmer can only sell produce to a licensed trader in one of four physical locations: mandis operated by marketing committees, very few private mandis, cold storage warehouses declared as deemed markets, or direct licensees which have to notify a space with certain facilities. Mandi secretaries say most big farmers bring a truckload of produce; they know the officials there, they have access to knowledge about prices and they get the right price. But a small farmer may produce just two quintals. So an aggregator at the village level will take it to the mandi with the understanding that he will take a set percentage of the sale price, and give the rest to the farmer. But in more than 50% of cases, farmers are being cheated by aggregators who get a receipt for a lower price.

•Number two, the contract farming ordinance. If I’m a large farmer who grows a large quantity of high quality organic potatoes and sells to a big retail chain dependent on me, I can negotiate my terms. But if I’m a small marginal farmer who wants to grow a high value crop like that which doesn’t have that much demand in mandis, or if I add value in terms of processing, then I have to take the total risk in terms of production and then go find a buyer in the industry.

•This ordinance allows the small farmer to benefit from a high value product by transferring the risk to the corporate purchaser, who will buy the produce at a fixed rate. The industry can also provide technology inputs and get seeds and pesticides at wholesale prices, which will translate into higher production, higher value, higher incomes. There is also a unique provision for production agreements, where the farmer is simply paid for agricultural services rendered, and this is very useful in poultry and livestock sector.

Will the safety net of MSP continue to remain effective under the new direct marketing regime?

•This provides a different option to farmers. MSP is a support system for the farmer, where he knows he can sell at a certain place for that price. There is a clear assurance that MSP shall continue. But going to the MSP centre also has a cost, so now the farmer has an option to choose direct marketing instead.

•Why do you think that the farmer will not understand if the price offered in the village is not the right price? He is aware of the mandi price and the MSP rate. There is also an important provision to develop a price information and market research system under the Act. So he can make an informed choice.

•We are also creating the right ecosystem through Kisan Credit Cards, farmer producer organisations which will provide marketing and legal support, and creation of Rs. 1 lakh crore financing facility for post harvest management.

•If you consider a child as weak, and always handhold that child, try to protect that child, the child will never grow. Our farmers are strong, they have knowledge and competence and have brought India to this stage of surplus foodgrain. Considering farmers as vulnerable, thinking people will take them for a ride in everything, limiting their choices, restricting them — that is not helpful. Every provision in this Act is in farmers’ interest.

πŸ“° Economy to contract 3.2% in FY21: WB

Shrinkage in India GDP attributed to COVID-19, curbs, says World Bank; forecasts 3.1% growth in FY22

•The Indian economy is expected to contract by 3.2% in this fiscal year as a result of the COVID-19 pandemic and its associated restrictions, the World Bank said in its Global Economic Prospects (GEP) June 2020 report released on Monday. Growth is forecast at 3.1% next year.

•The world economy, as a whole, is set to witness its deepest recession since World War II, with a forecasted contraction of 5.2% this year — some 60 million could be pushed into extreme poverty, World Bank Group President David Malpass had warned last week.

•With updated data now available, this number could be 70-100 million, a Bank economist told reporters on a briefing call on Monday.

•Emerging market and developing economies (EMDEs) are expected to contract by 2.5% this year, and economic activity in advanced economies is forecast to shrink by 7%, as domestic supply and demand, finance and trade have been disrupted due to the pandemic. Countries most reliant on global trade, tourism, external financing and commodity exports are likely to be hit the hardest.

•“This is a deeply sobering outlook, with the crisis likely to leave long-lasting scars and pose major global challenges,” said World Bank economist Ceyla Pazarbasioglu.

•In the baseline scenario, global growth is set to rebound at 4.2% in 2021, with EMDEs growing at 4.6% and advanced economies growing at 3.9%.

•This, however, is the baseline forecast and assumes that pandemic-induced domestic restrictions will be lifted by mid-year in advanced economies and a bit later in EMDEs.

•The downside scenario is more severe — the global economy could shrink this year by as much as 8% (5% for EMDEs), followed by weak recovery at just above 1% growth next year.

India grew 4.2% in FY20

•India’s growth is estimated to have slowed to 4.2% in FY 2019-20 (year ended March 31, 2020). Output is expected to contract by 3.2% (so growth is -3.2%) in FY2020-21, as the impact of the pandemic (the restrictions on activity) will largely fall in this year, despite the fiscal and monetary stimulus.

Balance sheet stress

•The growth forecast for this fiscal year is 9 percentage points lower than the GEP forecasts from January 2020, when the forecast for this fiscal was a (positive) 5.8% — the world was not yet in the grip of the pandemic.

•Spillover effects from weak global growth and balance sheet stress are also weighing down on economic activity, as per the report. India is forecast to see some recovery next year and grow at 3.1%.

πŸ“° RBI moots comprehensive norms for sale of loans

Price discovery process deregulated to be in accordance with lenders’ policies

•The Reserve Bank of India (RBI) has proposed a comprehensive set of norms for sale of loans by banks which could be either standard or sub-standard. The move is aimed at building a robust secondary market for bank loans that could ensure proper price discovery and can be used as an indicator for impending stress, the central bank said.

•At present, the guidelines for sale of loan exposures, both standard as well as stressed exposures, are spread across various circulars of the RBI.

•Observing that loan sales are carried out by lenders for reasons ranging from strategic sales to rebalancing their exposures or as a means to achieve resolution of stressed assets by extinguishing the exposures, the RBI said, “A dynamic secondary market for bank loans will also ensure proper discovery of credit risk pricing associated with each exposure, and will be useful as a leading indicator for impending stress, if any, provided that the volumes are sufficiently large.”

•These guidelines will be applicable to commercial banks, all financial institutions, non-banking finance companies and small finance banks.

•The directions will be applicable to all loan sales, including sale of loans to special purpose entities for the purpose of securitisation, the RBI said.

•“The price discovery process has been deregulated to be as per the lenders’ policy,” the draft norms said.

•According to the draft framework, standard assets would be allowed to be sold by lenders through assignment, novation or a loan participation contract .

•The stressed assets, however, would be allowed to be sold only through assignment or novation, the draft said adding, “stressed assets may be sold to any entity that is permitted to take on loan exposures by its statutory or regulatory framework”. It is also proposed to do away with the requirement of Minimum Retention Requirement (MRR) for sale of loans by lenders.

•Comments have been invited from stakeholders on the draft framework by June 30.

•The central bank has also proposed significant changes in securitisation norms which are aimed at development of a strong and robust market for such transactions.

•The revision in guidelines is an attempt to align the regulatory framework with the Basel guidelines on securitisation that have come into force effective January 1, 2018, the RBI said.

•Only transactions that result in multiple tranches of securities being issued reflecting different credit risks will be treated as securitisation transactions, and accordingly covered under these revised norms.

•The norm has prescribed a special case of securitisation, called Simple, Transparent and Comparable (STC) securitisations with clearly defined criteria and preferential capital treatment.

•The definition of securitisation has been modified to allow single asset securitisations. Securitisation of exposures purchased from other lenders has been allowed, according to the revised guidelines.

•“One of the key changes relates to differential treatment for Residential Mortgage Backed Securities (RMBS) compared to other securitisations in respect of prescriptions regarding minimum holding period (MHP), minimum retention requirements (MRR) and reset of credit enhancements,” the draft norms said.

πŸ“° Resume dialogue with Nepal now

India should take the lead in ending a deadlock that goes against the interest of bilateral ties with Nepal

•The time of a pandemic is not the time to have a hostile neighbourhood. At this moment, India should ideally lead in creating momentum for deeper regional and sub-regional cooperation in South Asia. Ironically, the recent developments with Nepal have been the opposite of that. India and Nepal have reached a new low in bilateral relations when both countries are facing a humanitarian crisis.

Official statements

•On May 8, the Defence Minister of India tweeted: “Delighted to inaugurate the Link Road to Mansarovar Yatra today. The BRO achieved road connectivity from Dharchula to Lipulekh (China Border) known as Kailash-Mansarovar Yatra Route. Also flagged off a convoy of vehicles from Pithoragarh to Gunji through video conferencing.” The announcement and its timing surprised even the keen observers of India-Nepal relations. No one thought that a road project in this territory would get inaugurated so urgently and through video conferencing. The announcement immediately put the Nepal government, the people and political players there on high alert. The Oli government’s sharp reaction was unexpected — the road was being built for years, so for it to pretend that it was unaware of this development and therefore surprised at its inauguration defies logic.

•In a statement, the Nepalese Ministry of Foreign Affairs expressed regret at India’s move. It said, “As per the Sugauli Treaty (1816), all the territories east of Kali (Mahakali) River, including Limpiyadhura, Kalapani and Lipu Lekh, belong to Nepal. This was reiterated by the Government of Nepal several times in the past and most recently through a diplomatic note addressed to the Government of India dated 20 November 2019 in response to the new political map issued by the latter.” It cautioned the Indian government against carrying out “any activity inside the territory of Nepal”. It stated that “Nepal had expressed its disagreement in 2015 through separate diplomatic notes addressed to the governments of both India and China when the two sides agreed to include Lipu Lekh Pass as a bilateral trade route without Nepal’s consent in the Joint Statement issued on 15 May 2015 during the official visit of the Prime Minister of India to China.” Nepal said it believed in resolving the pending boundary issues through diplomatic means. It said that Kathmandu had proposed twice the dates for holding the Foreign Secretary-level meeting between the two countries.

•There was a long-awaited response to this from the Ministry of External Affairs (MEA). Without giving any specific date, the MEA assured Nepal that talks would begin after the lockdown was lifted. The delay is not understandable. Why can’t discussions take place over video conferencing? India’s response to Nepal’s note said: “The recently inaugurated road section in Pithoragarh district in the State of Uttarakhand lies completely within the territory of India. The road follows the pre-existing route used by the pilgrims of the Kailash-Mansarovar Yatra. India and Nepal have established mechanism to deal with all boundary matters. The boundary delineation exercise with Nepal is ongoing. India is committed to resolving outstanding boundary issues through diplomatic dialogue and in the spirit of our close and friendly bilateral relations with Nepal.” Nepal’s Foreign Minister Pradeep Kumar Gyawali asked why talks on this important matter could not take place under lockdown when the ‘inauguration’ of the road could take place during the COVID-19 crisis. We also believe that it should take place without wasting even a day.

•The strain in ties also reflects the tensions in Nepal’s politics. Prime Minister K.P. Sharma Oli stepped out of diplomatic nicety when he indulged in reactionary nationalism and termed the “Indian virus” as more damaging than the “Chinese virus”. He also questioned India’s faith in ‘Satyameva Jayate’.

•On India’s part, the problem lies in overlooking the past realities of Lipulekh region. The Army Chief’s statement that “there is reason to believe” that Nepal’s recent objection was “at the behest of someone else”, hinting at China’s possible role, was eminently avoidable. This too drew sharp reactions from Nepal.

A unique relationship

•India and Nepal enjoy a unique relationship that goes beyond diplomacy and the governments of the day. Both countries are interdependent through shared social, cultural, economic and other civilisational links. Here, the ties are not between the governments alone. Over three million Nepalese live in India and lakhs of Indians live in Nepal. The Gurkha Rifles, known for the best in warfare, are incomplete without the Nepalese. They fight to keep India secure, so where is the scope for conflict? The people of Nepal fought for India’s independence. B.P. Koirala and many more Nepalese made enormous sacrifices during the freedom struggle. Both countries have open borders and unique ties. This reminds us that both countries have shared interests while respecting each others’ sovereignty. There is no place for a ‘big brother’ attitude. The regimes in New Delhi and Kathmandu have to exercise caution and restraint. The boundary controversy on Lipulekh, Kalapani and Limpiyadhura should be seen in retrospection. It must be admitted that Nepal’s kings had neglected this territory for decades. The area attained prominence only with Nepal’s tryst with parliamentary democracy beginning in 1990. The consistent neglect for the area is evident in the fact that the last official record of any government work that happened there was in 1953. A census was conducted in this area by the royal regime of Nepal and the land records from there were archived at the Darchula district office.

•Article 8 of the India-Nepal Friendship Treaty, 1950 says, “So far as matters dealt with herein are concerned, this Treaty cancels all previous Treaties, agreements and engagements entered into on behalf of India between the British Government and the Government of Nepal”, though the treaty does not define the India-Nepal boundary. On the issue of defining the boundary, the Treaty of Sugauli (1816) and the 1960 agreement between India and Nepal on the four Terai districts prevail. The Sugauli Treaty outlines the east of Mahakali River as Nepal’s territory, and the west of it as India’s territory. The dispute today is with regard to the origin of the Kali River. Nepal claims that the origin is in the higher reaches of this hilly territory which would establish its claim on Kalapani and Lipulekh. The Boundary Committee constituted in the year 2000 failed to resolve the issue. There is a need to renew it to end the cartographic tussle between the two countries.

•It is time to repose faith in constructive dialogue with empathy to resolve any matter that disturbs the calm between the two countries. In good and bad times, India and Nepal have to live together. Diplomatic dialogue should be resumed at the earliest possible. Embassies on both sides should be allowed to function freely. Nothing of the sort that happened in 2015 should be repeated now. India should not shy away from a dialogue even during the COVID-19 crisis. The MEA’s latest statement should materialise in action and restore trust and confidence through constructive dialogue.

πŸ“° The critical role of decentralised responses

Strategies in tackling the COVID-19 crisis must include local governments being equipped and fiscally empowered

•The novel coronavirus pandemic has brought home the critical role of local governments and decentralised responses. In terms of information, monitoring and immediate action, local governments are at an advantage, and eminently, to meet any disaster such as COVID-19. While imposing restrictive conditionalities on States availing themselves of the enhanced borrowing limits (3.5% to 5% of Gross State Domestic Product, or GSDP) for 2020-21 is unwarranted, the recognition that local governments should be fiscally empowered immediately is a valid signal for the future of local governance. This article makes some suggestions to improve local finance and argues that the extant fiscal illusion is a great deterrent to mobilisation.

Core issues

•COVID-19 has raised home four major challenges: economic, health, welfare/livelihood and resource mobilisation. These challenges have to be addressed by all tiers of government in the federal polity, jointly and severally. Own revenue is the critical lever of local government empowerment. Of course the several lacunae that continue to bedevil local governance have to be simultaneously addressed. One, the new normal demands a paradigm shift in the delivery of health care at the cutting edge level. Two, the parallel bodies that have come up after the 73rd/74th Constitutional Amendments have considerably distorted the functions-fund flow matrix at the lower level of governance. Three, there is yet no clarity in the assignment of functions, functionaries and financial responsibilities to local governments. Functional mapping and responsibilities continue to be ambiguous in many States. Instructively, Kerala attempted even responsibility mapping besides activity mapping. Four, the critical role of local governments will have to be recognised by all. A few suggestions for resource mobilisation are given under three heads: local finance, Members of Parliament Local Area Development Scheme, or MPLADs, and the Fifteenth Finance Commission (FFC).

Local finance

•Property tax collection with appropriate exemptions should be a compulsory levy and preferably must cover land. The Economic Survey 2017-18 points out that urban local governments, or ULGs, generate about 44% of their revenue from own sources as against only 5% by rural local governments, or RLGs. Per capita own revenue collected by ULGs is about 3% of urban per capita income while the corresponding figure is only 0.1% for RLGs. There is a yawning gap between tax potential and actual collection, resulting in colossal underperformance. When they are not taxed, people remain indifferent. LGs, States and people seem to labour under a fiscal illusion. In States such as Uttar Pradesh, Bihar and Jharkhand, local tax collection at the panchayat level is next to nil. Property tax forms the major source of local revenue throughout the world. All States should take steps to enhance and rationalise property tax regime. A recent study by Professor O.P. Mathur shows that the share of property tax in GDP has been declining since 2002-03. This portends a wrong signal. The share of property tax in India in 2017-18 is only 0.14% of GDP as against 2.1% in the Organisation for Economic Co-operation and Development (OECD) countries. If property tax covers land, that will hugely enhance the yield from this source even without any increase in rates.

•Land monetisation and betterment levy may be tried in the context of COVID-19 in India. To be sure, land values have to be unbundled for socially relevant purposes.

•Municipalities and even suburban panchayats can issue a corona containment bond for a period of say 10 years, on a coupon rate below market rate but significantly above the reverse repo rate to attract banks. We are appealing to the patriotic sentiments of non-resident Indians and rich citizens. Needless to say, credit rating is not to be the weighing consideration. That the Resurgent India Bond of 1998 could mobilise over $4 billion in a few days encourages us to try this option.

MP fund scheme

•The suspension of MPLADS by the Union government for two years is a welcome measure. The annual budget was around Rs. 4,000 crore. The Union government has appropriated the entire allocation along with the huge non-lapseable arrears. MPLADs, which was avowedly earmarked for local area development, must be assigned to local governments, preferably to panchayats on the basis of well-defined criteria.

•A special COVID-19 containment grant to the LGs by the FFC to be distributed on the basis of SFC-laid criteria is the need of the hour. The commission may do well to consider this. The local government grant of Rs. 90,000 crore for 2020-2021 by the FFC is only 3% higher than that recommended by the Fourteenth Finance Commission. For panchayats there is only an increase of Rs. 63 crore. The commission’s claim that the grant works out to 4.31% of the divisible pool and that it is higher than the 3.54% of the FC-XIV is obviously because the size of the denominator is smaller. Building health infrastructure and disease control strategies at the local level find no mention in the five tranches of the packages announced by the Union Finance Minister. The claim for a higher award to LGs is loud and clear.

•The ratio of basic to tied grant is fixed at 50:50 by the commission. In the context of the crisis under way, all grants must be untied for freely evolving proper COVID-19 containment strategies locally. Further the 13th Finance Commission’s recommendation to tie local grants to the union divisible pool of taxes to ensure a buoyant and predictable source of revenue to LGs (accepted by the then Union government) must be restored by the commission.

•Flood, drought, and earthquakes are taken care of by the Disaster Management Act 2005 which does not recognise epidemics, although several parts of India experienced several bouts of various flus in the past. The new pandemic is a public health challenge of an unprecedented nature along with livelihood and welfare challenges. The first Report speaks of mitigation funds and even prepared a disaster risk index, to map out vulnerable areas. These are redundant in the present context. The 2005 Act may have to be modified to accommodate the emerging situation.

•COVID-19 has woken us up to the reality that local governments must be equipped and empowered. Relevant action is the critical need.

πŸ“° Who’s afraid of monetisation of the deficit?

The shrill clamour against it is based on misconceptions; fears of inflation lack substance

•As the government began to wrestle with the severe downturn caused by the novel coronavirus pandemic, some economic pundits urged the government to go out and spend without worrying about the increase in public debt. They said the rating agencies would understand that these are unusual times. If they did not and chose to downgrade India, we should not lose too much sleep over it.

Rating and fundamentals

•Well, the decision of the rating agency, Moody’s, to downgrade India from Baa2 to Baa3 should come as a rude awakening. The present rating is just one notch above the ‘junk’ category. Moody’s has also retained its negative outlook on India, which suggests that a further downgrade is more likely than an upgrade.

•The rationale given by Moody’s should especially make people sit up. The downgrade, Moody’s says, has not factored in the economic impact of the pandemic. It has to do with India’s fundamentals before the onset of the pandemic and the extended lockdown with which India responded. The message should be clear enough. Any further deterioration in the fundamentals from now on will push India into ‘junk’ status.

•We should not lose sleep over a further downgrade and simply borrow our way out of trouble? Anybody who thinks so is living in cloud cuckoo land. Whatever the failings of the agencies, in the imperfect world of global finance that we live in, their ratings do carry weight. Institutional investors are largely bound by covenants that require them to exit an economy that falls below investment grade.

•If India is downgraded to junk status, foreign institutional investors, or FIIs, will flee in droves. The stock and bond markets will take a severe beating. The rupee will depreciate hugely and the central bank will have its hands full trying to stave off a foreign exchange crisis. That is the last thing we need at the moment.

Work towards an upgrade

•We have to put our best foot forward now to prevent a downgrade and bring about an upgrade instead. To do so, we need to note the key concerns that Moody’s has cited in effecting the present downgrade to our rating: slowing growth, rising debt and financial sector weakness. These concerns are legitimate.

•Many economists as also the Reserve Bank of India (RBI) expect India’s economy to shrink in FY 2020-21. The combined fiscal deficit of the Centre and the States is expected to be in the region of 12% of GDP. Moody’s expects India’s public debt to GDP ratio to rise from 72% of GDP to 84% of GDP in 2020-21. The banking sector had non-performing assets of over 9% of advances before the onset of the pandemic. Weak growth and rising bankruptcies will increase stress in the banking sector.

•The government’s focus thus far has been on reassuring the financial markets that the fisc will not spin out of control. It has kept the ‘discretionary fiscal stimulus’ down to 1% of GDP, a figure that is most modest in relation to that of many other economies, especially developed economies. (‘Discretionary fiscal stimulus’ refers to an increase in the fiscal deficit caused by government policy as distinct from an increase caused by slowing growth, the latter being called an ‘automatic stabiliser’ ).

•Keeping the fiscal deficit on a leash addresses the concerns of rating agencies about a rise in the public debt to GDP ratio. But it does little to address their concerns about growth. The debt to GDP ratio will worsen and financial stress will accentuate if growth fails to recover quickly enough. The government’s stimulus package relies heavily on the banking system to shore up growth. But there is only so much banks can do. More government spending is required, especially for infrastructure.

Clearing misapprehensions

•We need to increase the discretionary fiscal stimulus without increasing public debt. The answer is monetisation of the deficit, that is, the central bank providing funds to the government. Mention ‘monetisation of deficit’ and many economic pundits will cower in terror. These fears are based on misconceptions about monetisation of the deficit and its effects.

•A common misconception is that it involves ‘printing notes’. One image that leaps to mind is the printing presses of central banks cranking out notes with abandon. But that is not how central banks fund the government. The central bank typically funds the government by buying Treasury bills. As proponents of what is called Modern Monetary Theory point out, even that is not required. The central bank could simply credit the Treasury’s account with itself through an electronic accounting entry.

•When the government spends the extra funds that have come into its account, there is an increase in ‘Base money’, that is, currency plus banks’ reserves. So, yes, monetisation results in an expansion of money supply. But that is not the same as printing currency notes.

•What could be the objection to such an expansion in money supply? It could be that the expansion is inflationary. This objection has little substance in a situation where aggregate demand has fallen sharply and there is an increase in unemployment. In such a situation, monetisation of the deficit is more likely to raise actual output closer to potential output without any great increase in inflation.

•Exponents of the MMT make a more striking point. They say there is nothing particularly virtuous about the government incurring expenditure and issuing bonds to banks instead of issuing these to the central bank. The expansion in base money and hence in money supply is the same in either route. (The precise sequence of central bank transactions in these two cases and the identity in outcomes is shown in Macroeconomics by Mitchell, Wray and Watts, three economists who are among the leading exponents of MMT). The preference for private debt is voluntary. MMT exponents say it has more to do with an ideological preference for limiting government expenditure. But that is a debate for another day.

•Central banks worldwide have resorted to massive purchases of government bonds in the secondary market in recent years, with the RBI joining the party of late. These are carried out under Open Market Operations (OMO). The impact on money supply is the same whether the central bank acquires government bonds in the secondary market or directly from the Treasury. So why the shrill clamour against monetisation of public debt?

About inflation control

•OMO is said to be a lesser evil than direct monetisation because the former is a ‘temporary’ expansion in the central bank’s balance sheet whereas the latter is ‘permanent’. But we know that even so-called ‘temporary’ expansions can last for long periods with identical effects on inflation. What matters, therefore, is not whether the central bank’s balance sheet expansion is temporary or permanent but how it impacts inflation. As long as inflation is kept under control, it is hard to argue against monetisation of the deficit in a situation such as the one we are now confronted with.

•We now have a way out of the constraints imposed by sovereign ratings. The government must confine itself to the additional borrowing of Rs. 4.2 trillion which it has announced. Further discretionary fiscal stimulus must happen through monetisation of the deficit. That way, the debt to GDP ratio can be kept under control while also addressing concerns about growth. The rating agencies should be worrying not about monetisation per se but about its impact on inflation. As long as inflation is kept under control, they should not have concerns — and we need not lose sleep over a possible downgrade.