Should India Drop Helicopter Money?

Dear All,

Should India Drop Helicopter Money? - Imagine waking one morning to find extra cash in your account, a gift from your country’s central bank. That might sound outlandish — even some proponents of the idea admit it’s unlikely. But the concept of so-called helicopter money has been seriously debated by economists for several years and is coming back into vogue. and even now is the growing debate across India in the wake of a massive slump in the economy caused by COVID 19.

Helicopter money or helicopter drop was coined by Milton Friedman, US economist, in 1969 in one of his papers. He used this as a possible expansionary monetary measure. Basically, helicopter money means that the central bank prints huge quantities of currency and gives them to the government (not as a loan) without any security.

Or can say,

The government pumps money into the hands of the people through relief packages and the money is non-returnable by the people to the government. Helicopter money handed directly to consumers, the theory goes, would send us scurrying to the shops to spend our windfalls, boosting confidence in the economy. That increased demand would allow prices to rise again, a crucial step because a slide in prices, known as deflation, is viewed as creating the risk of extended stagnation.

Ideally, it must enhance the purchasing power of the people resulting in the revival of the economic cycle – demand, investment, production, employment, and GDP.

However, this expansionary measure is associated with a couple of risks as well.

1. Will spur up inflation: Many overall factors contribute to an economy's fall into a recession, as we found out during the U.S. financial crisis, but one of the major causes is inflation. ... The higher the rate of inflation, the smaller the percentage of goods and services that can be purchased with the same amount of money as before.

2.Will reduce the value of money and also cause depreciation of the currency: When a currency appreciates, it means it increased in value relative to another currency; depreciates means it weakened or fell in value relative to another currency.

Hence, the country should try with alternatives to diffuse the crisis.

So the focus will be on reviving the investment cycle through reducing repo rates as already comes down to 3.75%, as well as providing essential commodities at subsidized rates to the lower strata.

RBI had already announced multiple series of sovereign Gold Bond which are linked to golf return. The repo rate should not be reduced to a level that creates an arbitrage opportunity. The cheap borrowed money will lead to market bubbles.

From the behavioral economics perspective, people spend borrowed money rationally (hence controlled inflation), while purchases are irrational from freely received money (leads to hyper inflation).

Countries that have suffered horrendous inflation rates are Germany, Venezuela, Zimbabwe, and the United States during the Civil War. Venezuela is still trying to cope with hyperinflation in the present day.

In 2016, amidst a slowing economy, Japan almost decided to drop helicopter money. but “Adopting helicopter money in the strict sense is impossible as it’s prohibited by law,” said one of the officials. “If it’s about the buying huge amounts of bonds and the government deploying fiscal stimulus, we’re already doing that.”

So I think "It’s an illusion to think that a country can spend as much money as it wants, without having to pay it back."

With this backdrop, give a thought whether India should drop helicopter money to revive the Indian economy or provide easy loans?

Regards,

Kavya Gupta